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Keyword: ‘partnership’

The Curse of Limited Liability; Executives/traders of big financial corporations generate risky business, while smaller partnerships are much more risk averse

February 26th, 2009 No comments

The February 25 Wall Street Journal carries an insightful piece of commentary by James K. Glassman (president of the World Growth Institute and a former undersecretary of state) and William T. Nolan (president of Devonshire Holdings and former associate at Brown Brothers Harriman & Co. in the early 1970s) .

The Glassman and Nolan piece, entitled Bankers Need More Skin in the Game; Partnerships may be a more trustworthy business model than corporations,” echoes in the context of Wall Street financial institutions the theme of inappropriate managerial risk-taking that I have previously blogged on a number of times regarding the consequences of  the “limited liability” corporate form.  Glassman and Nolan point to the sterling performance of Brown Brothers Harriman & Co., the oldest and largest partnership bank in the U.S., founded in 1818.

The Glassman and Nolan editorial is worth reading in whole, for purposes of discussion I excerpt portions here (bolding is mine):

“Of all the causes of the financial meltdown of the past few years, the easiest to understand is that an irresponsible attitude toward risk led to terrible mistakes in judgment. But where did this casual approach to risk originate?

A major culprit, we believe, is a change in the way Wall Street financial institutions are organized. During the late 1970s and ’80s, much of the responsibility for risk was transferred away from the people who made the financial decisions. As a result, leverage rose from 20-1 to 40-1 or higher, creating shaky towers of debt, which, as we know, eventually collapsed. …

“The trick is to find a way to encourage sensible risk-taking, while dampening the impulse to take chances that can throw an economy into recession and force taxpayers to bail out a banking system.

Can government accomplish this feat through rule-making and regulatory oversight? It is unlikely. As the Nobel Prize-winning economist Friedrich von Hayek correctly emphasized, no one — not even a politician or a bureaucrat — can gain the broad and deep knowledge necessary to make wise enough rules. Moreover, in a $14 trillion economy, you can’t hire enough overseers to pore over everyone’s books.

There is, however, a better solution: expose players in the financial game to greater personal loss if their risk-taking fails. When you worry that a mistake will cause you to lose your second home, your stocks and bonds and your club memberships, then you’re less likely to take the kinds of risks that expose the rest of society to your failures.

“A simple mechanism exists to achieve this purpose: the private partnership. Partners face liability that extends to their personal assets. They aren’t protected by the corporate shield that limits losses to what the corporation itself owns (as well as the value of the stocks and bonds the corporation has issued). Unfortunately, the partnership is a legal form of business organization that was largely abandoned by banks over the past quarter-century. Our advice is to bring it back. …

“Even John Gutfreund — the man who kicked off the dramatic change in investment-banking culture and structure when he took Salomon Brothers, a longtime partnership, public in 1981 — confirms our thesis. Michael Lewis wrote in the December issue of Condé Nast Portfolio that Mr. Gutfreund now believes “that the main effect of turning a partnership into a corporation was to transfer financial risk to the shareholders. ‘When things go wrong, it’s their problem,'” said Mr. Gutfreund.

“But when the personal wealth of executives is put at risk, as it is in a partnership, their behavior changes. Risk aversion increases. Few partnerships would leverage themselves to the hilt to load up on risky subprime loans.

“How do we know this? Luckily, for this financial experiment, there is a control case: Brown Brothers Harriman & Co. ….

“Some would say that BBH is sui generis. Would its structure work more broadly for financial institutions? It already is. As large brokers merged into huge corporations with greater concentration in real-estate finance, corporate finance migrated to private equity firms and hedge funds, which are generally structured as partnerships. While many of these new engines of finance have suffered in the recent meltdown, they generally didn’t engage in such extreme risk-taking and thus haven’t become wards of the state.

“We know from Alfred Chandler, the great business historian, that “strategy determines structure.” Similarly, structure determines behavior — in this case, a healthier attitude toward risk. It is unlikely that a partnership will grow to the size of a Bank of America or Citigroup, but, while size can boost efficiency, it also poses systemic risk. As partnerships — and corporations with partnership attributes — replace behemoths, the current crisis will spawn structures for future success.  …

We do not believe that government should require banks to be partnerships. Rather, investors — and governments — should recognize the extra safety inherent in doing business with partnerships.

I have previously argued that one of the key state interventions that has fuelled the rent-seeking and risk socialization that we see today is the grants of blanket limited liability to shareholders, along with the grant of legal personhood (with unlimited purposes and life and Constitutional rights) to corporations:

Limited liability has enabled corporate managers to act without close shareholder oversight and management; this I believe has played a key role in the vast misalignment of incentives that Michael Lewis and David Einhorn describe at the NYT, and in the risk mismanagement that Joe Nocera of the NYT describes at length in the NYT Magazine.  Those taking large bonuses (whether in the financial industry or large corporations) were essentially playing with OPM – Other People’s Money – and capturing the upside of short-term gains while leaving shareholders and taxpayers holding the bag for loses.

I hope that you and others here will look more deeply at the role of the state in the problem of misaligned incentives that continue to corrupt American capitalism.

It is not clear what Glassman and Nolan intend with their reference to “corporations with partnership attributes”, but I would note that corporations that make use of an unlimited liability structure (as American Express once did) share the main “partnership attribute” – that the owners of the firm may be, if the assets of the firm are insufficient, personally liable to creditors for all debts of the firm (other than those whose creditors agree in advance to limit recourse), particularly for torts to involuntary third parties.  The availability of the unlimited liability corporate form in various jurisdiction should be further investigated.

I agree with Glassman and Nolan that governments should recognize the better risk management that partnerships are likely to conduct, but not merely in the financial sector but in other industrial, commercial and professional fields as well.   Such recognition could take the form of eased regulations, for example.  I favor aggressive pursuit of this “carrot” approach to encouraging better risk management and less shifting of risks to shareholders, government and citizens generally.  However, this fails to consider what should be done about existing public companies and other limited liability corporations.  I would urge more aggressive veil-piercing, both judicially and by statute.

In any case, it is gratifying to see this topic getting some of the attention that it deserves.

Categories: limited liability, partnerships Tags:

Oct. 17, 2019 Petition filed by Carlos Ghosn’s lawyer for Dismissal of Prosecution

January 5th, 2020 No comments
Note: The below is an English version of a Petition for Dismissal of Prosecution that was filed by Hiroshi Kawatsu, a member of Carlos Ghosn’s legal team, with the Tokyo District Court on October 17, 2019.
It was posted in the “NBR’s_Japan_Forum” email forum. I have edited the formatting to improve readability. At this point, I have not seen the Japanese original.
The attorney who apparently wrote this is Hiroshi Kawatsu, who is a partner in the Kasumigaseki-sogo Law Office (for twenty years) and is the Director of the Research Office for Criminal Affairs of the Japan Federation of Bar Associations. More on his background here:
To: Tokyo District Court, 17th Criminal Division Department 2019 Toku (Wa) No.14 Companies Act Violation Criminal Case Defendant: Carlos Ghosn Bichara
Lead Defense Counsel:
Intended Claims Document
I. Petition for Dismissal of Prosecution
October 17, 2019
Hiroshi Kawatsu
The prosecution of this case is based on an extremely illegal and prejudicial investigation, and is an abuse of the official authority of criminal prosecution for unfair purposes against a backdrop of discrimination against Mr. Carlos Ghosn’s race, nationality and social standing. This prosecution should be dismissed.
1. Background — the Nissan-Renault integration “crisis”
Mr. Carlos Ghosn, from the time that he became the COO of Nissan in June 1999, understood that the key to the success of the alliance was mutual respect of each company’s autonomy and culture. With a deep understanding of Nissan’s history and corporate culture, Mr. Ghosn spearheaded the “Nissan Revival Plan.” In just 2 years, Mr. Ghosn was able to turn Nissan, which had an interest-bearing debt of more than 2 trillion yen and was on the verge of bankruptcy, back to being a profitable company and grow into one of the world’s leading automakers. Mr. Ghosn was consistent in his stance of protecting Nissan’s corporate identity. Even after he became the CEO of both Nissan and Renault in April 2005, thereby becoming responsible to the shareholders
of not just Nissan but also Renault, his attitude, based on his management beliefs, never changed. Renault’s largest shareholder, the French government, occasionally began to talk about building the closeness of the alliance between the two companies, referring to it as “irreversible integration.” In 2015, Minister of Economy, Industry and the Digital Sector, Emmanuel Macron, increased the French government’s shareholding ratio of Renault, and then applied the Florange Law to Renault which doubles the voting rights of long-term shareholders. This enabled the French government to reinforce its voice with Nissan through Renault which owns 43.3% of Nissan stock. Even so, Mr. Ghosn did not change his policy. He made the French government recognize that Nissan was going to maintain its autonomy. He loved the company that is Nissan. Mr. Ghosn became the Director Chairman in April 2017, and Mr. Hiroto Saikawa (hereafter, “Mr. Saikawa”) replaced him as CEO. When Macron became President the same year, the pressure from the French government to move towards “irreversible integration” became stronger. Mr. Ghosn’s position to take a stand against the French government to protect Nissan’s autonomy did not change. However, at the same time, Mr. Ghosn came to think that there is no choice but to restructure the strategic partnership of the alliance in a way that can be explained to Nissan’s largest shareholder, Renault (the French government). Each company of the alliance would be placed under the umbrella of a newly incorporated holding company, and each company would get a say based on their performance. The French government ought to be satisfied with this new structure. Mr. Ghosn began to explain this idea to some of the directors
of Nissan as well.
Those in Mr. Ghosn’s inner circle, as well as other officers of the Company began to sense Renault’s (the French government’s) yearning for an integration with Nissan, and the subtle changes in Mr. Ghosn’s way of thinking. In particular, some of Nissan’s Japanese officers believed that the new structure of the alliance would essentially mean the “integration” of Nissan and Renault.
Nissan is one of the group companies of the “Nissan Konzern [Conglomerate]” which was a newly-rising zaibatsu [family-run conglomerate] of the pre-war era, and has been manufacturing cars under the Datsun brand since before the war. The founder, Yoshisuke Ayukawa’s lineage is one of a father who was a feudal warrior of the Choshu domain and a mother who was the niece of former senior statesman Kaoru Inoue during the Meiji period. Ayukawa was a powerful entrepreneur and politician who also served after the war as a member of the House of Councilors and as Supreme Economic Advisor in the Kishi Cabinet. The company name “Nissan” derives from one of the group companies, “Nihon Sangyo” [Japanese Industry]. Some also believed that Nissan’s integration with Renault would mean that a company with the history of having a role in Japan’s key industry would pass over to the hands of foreigners. This belief was shared not only among the directors of Nissan, but also among key figures in the Japanese government, beginning with the Ministry of Economy, Trade and Industry.
2. Collusion between Nissan and the Task Force of the Tokyo District Public Prosecutors Office
After Mr. Ghosn stepped back as CEO in April 2017, Nissan’s business performance noticeably declined. Along with this, remarks by Renault (French Government), the largest shareholder, began to attract attention. The “integration” of Nissan and Renault became a realistic crisis to succeeding CEO, Mr. Saikawa, and other Japanese officers of Nissan.
Around January 2018, the French government informed the Japanese government that it intended to integrate the management of Nissan and Renault. In response, the [Japanese] Ministry of Economy, Trade and Industry (METI) sent a letter of opposition to the French Ministry of the Economy and Finance. Talks were held among the METI (Director-General Akihiro Tada, Manufacturing Industries Bureau), the French Ministry of the Economy and Finance (Director General Faure), the Agence des participations de l’État (APE) [French state holding agency] (Director Vial), among others, but no progress was made.
In February of the same year, Renault’s Board of Directors passed a resolution reappointing Mr. Ghosn as CEO until 2022. Nissan’s Japanese officers believed that the “integration” has increasingly become more realistic. Around March of the same year, Senior Managing Executive Officer Hitoshi Kawaguchi, Statutory Auditor Hidetoshi Imazu, and former Vice-Minister for International Affairs, Ministry of Economy, Trade and Industry Masakazu Toyoda (who became a director of Nissan in June of the same year), with others, led a top-secret effort to form a group to investigate the “improper acts” of Mr. Ghosn. Their aim was to prevent the integration of Nissan and Renault by finding Mr. Ghosn’s “improper acts” and ousting him from Nissan. So as to absolutely ensure that non-Japanese officers including Mr. Ghosn and Mr. Greg Kelly would not find out, they went through a former prosecutor with the Tokyo District Public Prosecutors Office’s Task Force, Akihide Kumada and others, to consult with the prosecutors of the Tokyo District Public Prosecutors Office’s Task Force, and while receiving their instructions, conducted a top-secret investigation to search for “improper acts” that could be established as a criminal case against Mr. Ghosn.
They asked Senior Managing Executive Officer in charge of Legal and Compliance, Mr. Hemant Kumar Nadanasabapathy (hereafter, “Mr. Hari Nada”), and attorneys of one of Nissan’s legal advisers, the law firm of Latham & Watkins (L&W), to conduct an investigation of the companies affiliated with the alliance, not just in Japan but worldwide. Mr. Hari Nada and the attorneys at L&W sent out letters to the management of affiliate companies worldwide to cooperate with the investigation, to appear at the Tokyo District Public Prosecutors Office and comply with the interrogations by the prosecutors, and which outlined that related expenses, etc. would be borne by Nissan, etc. Mr. Hari Nada and L&W were deeply involved in the events that were the subject of the investigation in the first instance. Investigative activities led by them are a conflict of interest, and lack impartiality. They, who were themselves in charge of the investigation, cast a blind eye to their own “improper acts” as well as those of Mr. Saikawa and
other Japanese executives, while single-mindedly searching for “improper acts” by Mr. Ghosn. The purpose of this unjust and biased investigation was to restructure the relationship between Nissan and Renault (French government) by unseating Mr. Ghosn and preventing the “integration” of the two companies.
The investigative team of the Tokyo District Public Prosecutors Office accepted the results of such unfair and biased investigation and commenced their criminal investigation. Furthermore, as described below, they also engaged in illegal investigative activities in Lebanon, Brazil, France, etc. using Nissan and its attorneys at its beck and call.
3. Illegal plea bargaining
(1) Illegality of the objective
The Public Prosecutors state that they reached an agreement with Mr. Hideaki Ohnuma (head of Nissan’s Secretariat Office; hereafter, “Mr. Ohnuma”) and Mr. Hari Nada (in charge of Nissan’s Legal Division) under the consultation and agreement program (the Japanese version of plea bargaining) of the 2016 Amended Code of Criminal Procedure to, in exchange for not indicting these two individuals, have them make witness statements and submit evidence to the prosecutors about the criminal charges against Mr. Ghosn who is believed to be an “accomplice.” However, this consultation and agreement (plea deal) was reached with the objective of ousting Mr. Ghosn from his position of Chairman and CEO of the Nissan- Renault-Mitsubishi Alliance based on discussions that were held between METI officials and the Japanese senior management executives of Nissan.
The objective is completely different from the intended purpose of the program, which is to, in cases where it is difficult to uncover the truth by conventional methods, offer accomplices advantageous prosecutorial treatment in exchange for cooperation with the investigation and prosecution of the case, so as to uncover the truth and prosecute the case appropriately.
(2) The actual party is Nissan
The prosecutors claim that of the criminal charges that have been alleged against Mr. Ghosn, consultations were held and an agreement reached with Mr. Ohnuma and Mr. Hari Nada regarding only the Financial Instruments and Exchange Act violations case (falsification of securities reports), and that as a result of plea bargaining on matters related only to those charges, those charges were dropped against these two individuals, but nothing could be further from the truth. First, these two individuals are not the actual parties in the plea bargain. It was the attorneys that were hired by the corporate entity of Nissan and its Japanese senior management executives that brought the case to the Tokyo District Public Prosecutors Office, cooperated with prosecutors, and reached an agreement. These attorneys were hired by Nissan for the purpose of searching for “improper activities” that would make Mr. Ghosn a suspect and, together with attorneys from L&W, communicated with the Tokyo District Public Prosecutors Office and conducted an “investigation” — the search for something with which to charge Mr. Ghosn.
As a result of the “investigation,” Nissan and the Tokyo District Public Prosecutors Office determined that Mr. Hari Nada and Mr. Ohnuma could potentially be charged as accomplices in the case involving violations of the Financial Instruments and Exchange Act and the case involving violations of the Companies Act, and decided to adopt a scheme in which Mr. Hari Nada and Mr. Ohnuma would be made the parties to a plea deal. Mr. Hari Nada and Mr. Ohnuma did not take the initiative on their own, nor make the decision on their own will, to cooperate with the prosecution of Mr. Ghosn. They were persuaded by Nissan — the Japanese senior management executives and Nissan’s attorneys — and merely signed the written agreement in obeyance of basically what was a “Company order.” This kind of application of the consultation and agreement program goes against its intended purport, and is illegal.
(3) Legal procedures were not carried out for crimes that were subject to plea bargaining
The content of the written agreements with Mr. Ohnuma and Mr. Hari Nada (Kou Exhibit 147, Kou Exhibit 148) in which the prosecutors demanded the examination of evidence state that an agreement was reached regarding the case involving violations of the Financial Instruments and Exchange Act, but there is no reference to the case involving violations of the Companies Act which is also a charge of the action — that an agreement was executed with Shinsei Bank that switched the party to swap agreements to Nissan (the charged facts in relation to the swap agreements), that payment of 14.7 million dollars was made to Khaled Juffali (the charged facts in relation to KJC), and that payment of 5 million dollars was made to Suhail Bahwan Automobiles (SBA) (the charged facts in relation to SBA). However, both Mr. Ohnuma and Mr. Hari Nada have provided witness statements regarding the case involving violations of the Companies Act (e.g. Kou Exhibits 40 through 44, Kou Exhibits 149, Kou Exhibits 174, Kou Exhibits175 of the Companies Act violation case).
With Mr. Ohnuma and Mr. Hari Nada, the prosecutors have engaged in plea deals in an informal manner, not based on the provisions of the law (to have accomplices make statements that implicate others in a crime by inducing them with advantages). It is illegal to engage in virtual plea bargaining without following the legal procedures, and it is not permissible to allow the resulting statements and evidence.
(4) An “under-the-table deal” was made
It was neither Mr. Ohnuma, the individual, nor Mr. Hari Nada, the individual, that brought up the idea of a plea deal with the prosecutors. It was Nissan, the company, its Japanese senior management executives, and the attorneys they hired, that proposed the criminal prosecution [of Mr. Ghosn] to the Task Force of the Tokyo District Public Prosecutors Office, and
proactively promoted the transaction consisting of providing evidence and witness testimony from those involved in exchange for not prosecuting them. As a result, consultations and agreements were effectively carried out between Nissan CEO Mr. Saikawa and multiple other individuals at Nissan, and the prosecutors of the Tokyo District Public Prosecutors Office’s Task Force regarding the provision of testimony and evidence disadvantageous to Mr. Ghosn in exchange for the dropping of criminal charges against such individuals.
In particular, Mr. Saikawa is a submitter of the Annual Securities Reports said to contain “misstatements” in relation to Mr. Ghosn’s director compensation in the Financial and Instruments Exchange Law violation case. Furthermore, he himself is the person who approved and decided the payment from the “CEO reserve” in the Companies Act violation case. It is clear that he was investigated as a suspect in these cases, and that the Tokyo District Public Prosecutor’s Office did not prosecute him in exchange for providing testimony and evidence that is disadvantageous to Mr. Ghosn. However, the Toyo District Public Prosecutor’s Office has not revealed whether a consultation and agreement has been made with Mr. Saikawa, and has refused to respond to requests for disclosure of evidence regarding this.
There are numerous other directors and employees of Nissan other than Mr. Saikawa that were involved in the acts stated in the prosecutors’ charges in this matter. Facing threats displayed by Nissan and the prosecutors that they may be subject to criminal prosecution, they were pressured to make statements in accordance to the wishes of Nissan and the prosecutors – statements that Mr. Ghosn behaved like a “dictator,” and that because they couldn’t defy his authority, they had no choice but to take part knowing it was wrong. It was based on this kind of an extensive “under-the-table deal” and unjust inducements that the indictment was carried out.
4. Illegal search and seizure
(1) Seizure of attorney Mr. Fadi Gebran’s personal computer and HDD, etc.
Mr. Ghosn’s personal residence that is also used as an office located in Beirut is managed by a local company called Phoinos, and Ms. Amal Abou Jaoude who was the representative of Phoinos was in charge of managing its affairs. Her salary and other expenses were paid by Nissan Middle East. Ms. Amal Abou Jaoude had at one time worked as a secretary of attorney Fadi Gebran, who passed away in August 2017, and managed the computer and other items he had left behind, as well as took care of his remaining affairs.
On November 19, 2018 (Beirut time), attorneys from L&W stole attorney Fadi Gebran’s PC and HDD which Ms. Amal managed, from her in Beirut. This PC and HDD contained a large amount of personal information such as email exchanges between attorney Fadi Gebran and his clients. The so-called evidence that prosecutors say they have obtained in this case as a result of analyzing the emails of attorney Fadi Gebran, etc. (for example, Kou Exhibit 182 forward of the Companies Act violation case) were discovered from the PC and HDD that the attorneys from L&W and others took without permission at this time.
They raided Ms. Amal Abou Jaoude’s office, and invaded Mr. Ghosn’s empty home while consulting with the Tokyo District Public Prosecutors Office in advance, and stole the PC, HDD and the contents saved therein without the consent of the proprietors, such as attorney Fadi Gebran’s surviving family and his clients. Acting as the hands and feet of the Tokyo prosecutors, they committed crimes of stealing data from other’s PC and HDD. The use by an investigator of a private citizen to carry out a search and seizure in order to circumvent the requirements of the warrant system (Article 35 of the Japanese Constitution) is, in itself, a serious illegal act that effaces the principles of the warrant system. It is also illegal and impermissible that the investigation authorities of the Japanese government use a private citizen, circumventing the formal legal process to gather information abroad where its investigative authority does not reach.
Furthermore, an enormous volume of communications with clients and documents prepared for clients was saved in attorney Gebran’s PC and HDD. These [communications and documents] are strongly protected as attorney-client privilege, not only within Lebanon, but around the world by international human rights laws, domestic constitutions and domestic laws. If this were not the case, one would not be able to solicit [services] from attorneys overseas with respect to international matters. The Tokyo District Public Prosecutor’s Office, as well as the L&W attorneys, seized these being fully aware that they contained a large amount of information subject to the attorney-client privilege.
The admissibility of evidence obtained as a result of such an illegal investigation must, of course, be denied. However, the illegality of the investigation and prosecution in this case is not something that can be straightened by simply excluding part of the evidence.
(2) Invasion of home/office in Rio de Janeiro
Mr. Ghosn’s personal residence that is also used as an office located in Rio de Janeiro is managed by a company called Hamsa, and Ms. Vania Rufino was in charge of managing its affairs. On November 19, 2018 (local time), an employee of Nissan Brazil made an unannounced visit to Ms. Ruffino’s office and questioned her asking such things as, “Did you do personal work for Carlos Ghosn?” In addition to a cell phone, PC, etc., all documents were also seized, and without providing any reason, Ms. Rufino was ordered to take a leave of absence. After that, the employee of Nissan Brazil proceeded to lock Mr. Ghosn’s house so that Mr. Ghosn or any of his family could not enter the home.
This, too, was nothing other than an illegal search and seizure that was conducted upon discussion between the Japanese prosecutorial authorities and Nissan.
(3) Search and Seizure in Tokyo on April 4, 2019
Early in the morning around 5:50 am on April 4, 2019, the Task Force of the Tokyo District Public Prosecutors Office arrested Mr. Carlos Ghosn on charges of violation of the Companies Act. At the time of his arrest, the Task Force also confiscated a personal computer, 3 smartphones, and a passport (issued by the country of Lebanon) that belonged to Mr. Ghosn’s wife, Mrs. Carole Ghosn, who was at the restricted residence where Mr. Ghosn was arrested. Mrs. Carole Ghosn who was shaken with fear was then intimidated and made to say the passwords on the smartphones.
The prosecutors claim that this seizure was a legitimate seizure carried out on the basis of a legally obtained search and seizure warrant. However, that warrant covered Mr. Ghosn’s belongings inside of his home, not Mrs. Carole Ghosn’s. The prosecutors deceived the court by lying that Mrs. Carole Ghosn’s PC, smartphones and passport were Mr. Ghosn’s possessions. The prosecutors and administrative officers of the Tokyo District Public Prosecutors Office who were involved in this search and seizure seized Mrs. Carole Ghosn’s PC, smartphones and the like having full knowledge of this.
Mrs. Carole Ghosn’s PC and smartphones that were seized based on this illegal search and seizure also included many e-mails and other communications between her and her lawyers. This is clearly an infringement of Mrs. Carole’s attorney-client privilege.
The PC and smartphones seized from Mrs. Carole also included data that related to communications between Mr. Ghosn and his lawyers. Furthermore, the notebook that Mr. Ghosn used while he was detained in the Tokyo Detention House to exchange information with his lawyers was also seized. Needless to say that this is illegal and a violation of Mr. Ghosn’s right to consult with his lawyers (Article 34 of the Constitution, Article 39, Paragraph 1 of the Criminal Procedure Code).
This illegal search and seizure should result of course in the exclusion of evidence; however, beyond that, this illegal [act], coupled with the other illegal [acts], invalidates the entirety of the
prosecution in this case.
5. Infringement of the right to a speedy trial
It was from around the Spring of 2018 that the Tokyo District Public Prosecutors Office, together with Japanese top management officials at Nissan, began investigating Mr. Ghosn’s “improper activities” as well as engaged in investigative activities related to the violations of the Financial Instruments and Exchange Act and the Companies Act which became the causes of action. Yet, they broke up the facts that were the subject of the investigation into small pieces and detained Mr. Ghosn repeatedly. With respect to the Financial Instruments and Exchange Law violation case, they even repeated arrests for every fiscal year. With respect to the Companies Act violation case as well, irrespective of the fact that they had obtained statements from Nissan directors by the beginning of 2019, they delayed the timing of his arrest. Moreover, they arrested Mr. Ghosn for the fourth time for violation of the Companies Act just as he was about to start preparing for trial for the case he was released on bail and indicted. As a result, Mr. Ghosn was held in custody for as many as 130 days.
Even with regard to the pretrial conference procedures, the prosecutors took as many as 4 months to submit the facts that they sought to prove. Also, the prosecutors delayed their answers to requests that were made by Mr. Ghosn’s attorneys for the disclosure of evidence, and failed to make clear when the evidentiary disclosure period would end. Furthermore, the prosecutors are engaging in illegal acts, violating legal requirements such as by limiting the disclosure to viewing by Mr. Ghosn’s attorneys only and by deleting electronic data subject to disclosure at Nissan’s request. They are returning evidence seized at Nissan’s request, ignoring Mr. Ghosn’s attorneys’ request for disclosure of evidence. As a result, the Companies Act violation case is still remiss, and similarly with respect to the Financial Instruments and Exchange Law violation case for which [Mr. Ghosn] was indicted in December 2018, the disclosure of evidence has not been
completed, nor is there even an outlook for completion.
In this way, the defense’s preparations have been obstructed and delayed, while on the other hand, the prosecutors continue to this day to conduct “supplementary investigations” by obtaining statements and evidence from involved persons residing overseas based on investigational assistance from the relevant foreign governments. They are still continuing the investigation that should have been completed prior to indictment. Even now, after more than 10 months since the initial indictment, there is no timeline for the start of a trial.
Mr. Ghosn’s right to a speedy trial (Article 37, Paragraph 1 of the Japanese Constitution; Article 14, Paragraph 3(C) of the International Covenant on Civil and Political Rights) has already been seriously infringed.
6. Illegal interference with personal life
From around March 6, 2019, ever since Mr. Ghosn was released on bail, Mr. Ghosn and his family have been followed by police officers or their affiliates. They are not inconspicuous in the way that they follow Mr. Ghosn and his family members, and in fact, linger around them in plain sight. This constant monitoring of Mr. Ghosn and his family even after his release has caused them mental anguish in their daily lives. This is a violation of Mr. Ghosn’s right to privacy and right to a peaceful everyday life.
Mr. Ghosn is not a terrorist, nor a member of an organized crime group. He is an international company executive. There is no legitimate reason, anywhere, for having to monitor him for the safety of the local community. Under this situation where Mr. Ghosn and his family are subject to regular psychological persecution by the investigational and prosecutorial authorities, Mr. Ghosn clearly cannot engage sufficiently in his defense activities. Mr. Ghosn’s right to a fair trial (Article 14, Paragraph 1 of the International Covenant on Civil and Political Rights; Article 37, Paragraph 1 of the Japanese Constitution) is also being compromised.
7. Information leaks and comments about guilt
The prosecutors told some members of the media in advance about the pending arrest of Mr. Ghosn before his actual arrest, thereby enabling them to report on the scene of his arrest at Haneda Airport. The prosecutors then repeatedly leaked one-sided and arbitrary information about their investigation to the media, such as that there is an abundance of evidence that shows Mr. Ghosn’s guilt: that agreements with Mr. Ghosn pertaining to his compensation had been obtained from those involved at Nissan (Asahi Shimbun Newspaper, November 27, 2018, evening edition), that there is evidence that future payments of compensation had already been fixed (Asahi Shimbun Newspaper, November 29, 2018, morning edition), or that “there are documents outlining payment methods” (Asahi Shimbun Newspaper, December 11, 2018), thereby giving the impression that there was abundant evidence of Mr. Ghosn’s guilt. The prosecutors, even though they still to this day have not proven anything, continued to leak information one after the next to suggest there was ample evidence to support the suspicion of aggravated breach of trust, such as that: a total of 14.7 million dollars was remitted in 4 installments from a subsidiary of Nissan to an acquaintance in Saudi Arabia (Asahi Shimbun Newspaper, December 22, 2018, morning edition); “funds in excess of 5 billion yen were caused to be disbursed from Nissan to the companies of 2 acquaintances in the Middle East” (Nihon Keizai Shimbun Newspaper, January 4, 2019); an executive of a sales distributor in Oman to which 3.5 billion yen was disbursed from a “CEO discretionary reserve” that is “under the direct jurisdiction” of Mr. Ghosn “paid approximately 1.6 billion yen as payment for a cruiser” that was purchased by a company in which Mr. Ghosn is involved (Nihon Keizai Shimbun Newspaper, January 11, 2019); “There is suspicion that Nissan funds were funneled to former Chairman Ghosn through GFI” (Asahi Shimbun Newspaper, April 4, 2019, morning edition), etc.
The prosecutors continued to make one-sided comments that assumed Mr. Ghosn’s guilt such
as that: “there was a cover-up to hide executive compensation” (Asahi Shimbun Newspaper, December 2, 2018, morning edition); “the Saudi business man [Juffali] has no actual business entity” (Asahi Shimbun Newspaper, December 26 2018); “falsifications were made to make it appear as though approval of the Board of Directors was obtained for the switching [of contract parties]” (Asahi Shimbun Newspaper, December 30, 2018); based on e-mails and the like that remained in a personal computer at the offices of a lawyer in Beirut, “it has been determined that the suspect, Ghosn, essentially owned GFI and allocated Nissan funds for private use” (Sankei Shimbun Newspaper, April 9, 2019, morning edition), etc. Based on these arbitrary and one- sided comments by the prosecutors, the media incessantly painted Mr. Ghosn as a villain who exploited the company for personal gain.
Meanwhile, the prosecutors also provided information about the investigation to the media that was in line with the interests of Nissan and its Japanese senior management executives such as that: Shinsei Bank demanded that the approval of the Board of Directors of Nissan be obtained, but Mr. Ghosn rejected it (Asahi, December 23, 2018, morning edition); Charges have been dropped against President and CEO Hiroto Saikawa who was accused of violating the Financial Instruments and Exchange Act due to “lack of evidence” (Asahi Shimbun Newspaper, May 18, 2019, morning edition), etc.
The media outlets competed in continuing coverage that was based on such information from the prosecution and in line with their intensions. As a result, Mr. Ghosn’s public reputation did a 180 from being the “’savior’ and ‘charismatic management executive’ who ‘saved Nissan which was in crisis on the brink of bankruptcy, and growing it into a world-class company’” to “a dictator that exploited the company to fatten his own wallet.” By now, his “improper activities” are treated as unquestionable facts, and the focus has moved onto “recurrence prevention.” In such an environment, there is no denying that it will be a virtual impossibility to have a fair trial in which Mr. Ghosn is afforded his right to a presumption of innocence and his right to an
adequate defense.
Be that as it may, the prosecutors’ frequent leaks of information about the investigation while the prosecution of the case has been ongoing as well as comments made by them that assume the guilt of Mr. Ghosn are in and of themselves occupational crimes by the prosecutors, or comparable illegal acts.
The act of a prosecutor leaking information about the investigation to the media is “an act of leaking secrets that were learned in an official capacity on the job” (Article 100, Paragraph 1 of the National Public Service Act), which is itself a crime (Article 109, Item 12 of the National Public Service Act). As explained above, in this case, due to such crimes committed by the prosecutors, Mr. Ghosn has been denied of his right to receive a fair criminal trial (Article 14, Paragraph 1 of the International Covenant on Civil and Political Rights; Article 37, Paragraph 1 of the Japanese Constitution) which is a basic human right.
In this case, even though Mr. Ghosn has not been found guilty through a trial, he has repeatedly been publicly assumed guilty through the media at the hands of the prosecutors who are national public servants. This is a violation of another basic right of Mr. Ghosn, the right to be presumed innocent (Article 14, Paragraph 2 of the International Covenant on Civil and Political Rights; Article 11, Paragraph 1 of the Universal Declaration of Human Rights).
8. A cozy relationship with Japanese officers at Nissan and the Ministry of Economy, Trade and Industry
In Japan, prosecutors, who have a monopoly of authority over criminal prosecution, and furthermore, who are “given a broad range of discretionary power” in exercising said authority (Judgment of the Supreme Court of Japan, December 17, 1980, 1st Petty Bench Decision, Criminal Procedure Code precedent 34-7-672, p. 675) are not permitted to act simply as a unilateral party in a lawsuit. Prosecutors are not allowed to be a servant to some, or an advocate
for a private benefit, and must carry out their functions impartially and avoid all discrimination as to race, nationality, etc. (Article 13 (A) of the United Nations Guidelines on the Role of Prosecutors), “in representation of the public interest” for the purpose of demanding “the proper application of the law in court” (Article 4 of the Public Prosecutor’s Office Act).
In this case, the prosecutors of the Task Force of the Tokyo District Public Prosecutors Office ignored this most basic of professional obligations of a prosecutor, and acted as a tool for realizing the objectives of the Ministry of Economy, Trade and Industry and Nissan’s Japanese senior management executives to prevent Nissan from becoming a French company. The prosecutors aided the objective to oust Mr. Ghosn by searching for “improper activities” committed by him and to building a criminal case against him, and used tax money to help them to that end. The prosecutors held discussions with Nissan’s Japanese senior management executives and the attorneys that represented them, and abused the “consultation and agreement (plea bargaining) system” so as to give one-sided consideration to Nissan’s interests. The prosecutors circumvented the requirement of obtaining a warrant and infringed on national sovereignty by using Nissan’s employees and attorneys as tools for carrying out their investigation overseas. The prosecutors, in order to shift the public’s focus away from these one-sided and unfair investigational prosecutorial activities and to gain the support of public opinion, committed the crimes of violating confidentiality and repeatedly leaking information about the investigation. The prosecutors, when asked during the pretrial conference procedure about their information leaks asserted that, “We believe there hasn’t been something like this,” which is factually impossible. And the prosecutors have delayed the disclosure of evidence to defense counsel, and moreover refused the disclosure itself in response to Nissan’s requests.
9. Prosecution based on an illegal investigation
This indictment could not have been realized without the egregiously illegal investigation
involving white-collar crimes by public servants as described thus far, and constitutes “a case in which the illegal nature of investigative procedures is material, where the indictment would have been impossible or extremely difficult unless the illegal procedures were predicated, and in that sense, is a case in which the two situations are closely related and inseparable” (Judgment of the High Court of Sendai, October 17, 1967, High Court Decision Criminal Procedure Code precedent 20-5-699, p. 706).
Therefore, this case must be dismissed (Id.).
10. Arbitrary and discriminatory exercise of the authority of prosecution
This investigation originated with the Ministry of Economy, Trade and Industry and the Japanese senior management executives of Nissan who wanted to prevent the “irreversible integration” of Nissan and Renault and stop Nissan from becoming a French company, and with the aim of ousting Mr. Ghosn who, as CEO of Renault, was working to facilitate the integration of Nissan and Renault, searched for “improper activities” on the part of Mr. Ghosn, and bring criminal charges against Mr. Ghosn for such activities, requested the cooperation of the Tokyo District Public Prosecutors Office by way of conducting an investigation that included plea bargaining. The Task Force of the Tokyo District Public Prosecutors Office complied with this request and commenced an investigation into this matter. In carrying out their investigation, as described above, the prosecutors only took Nissan’s interests into account and worked collusively with Nissan and its attorneys. In this case, there is no doubt that Mr. Ghosn has been discriminated against based on his race, nationality and/or social status. This investigation and prosecution is a case of “the defendant being treated unfairly and unfavorably in an investigation compared to general cases because of their ideology, religion, social status, lineage, etc.” (Judgment of the Supreme Court of Japan, 2nd Petty Bench decision, June 26, 1981, Criminal Procedure Code precedent 35-4-426, p. 429, Akasakicho Case). This is a violation of Article 14 of the Japanese
Constitution, and is also in violation of Article 13(A) of the United Nations Guidelines on the Role of Prosecutors.
As explained above, this criminal prosecution has been based on extremely illegal investigation activities that constitute professional crimes. In addition, the prosecution itself cannot be said to have been carried out “in representation of the public interest” for the purpose of demanding “the proper application of the law in court” (Article 4 of the Public Prosecutor’s Office Act). This prosecution falls under the category of “an extreme case in which the prosecution of the case itself constitutes a professional crime” (Judgment of the Supreme Court of Japan, 1st Petty Bench, December 17, 1980, Criminal Procedure Code precedent 34-7-672, p. 676, Chisso-Kawamoto Case).
Therefore, this prosecution is unconstitutional, illegal, and invalid.
II. Statute of Limitations
  1. With respect to the indictments stated in the Charging Sheet, dated January 11, 2019 (excluding, however, the one with payment date of March 27, 2012), the seven-year statute of limitations period (Article 250, Paragraph 2, Section 4 of the Code of Criminal Procedure) has passed, and the statute of limitations has expired. A judgment should therefore be rendered to dismiss them (Article 337, Paragraph 4 of the Code of Criminal Procedure).
  2. Article 255, Paragraph 1 of the Code of Criminal Procedure specifies that, “where the offender is outside Japan,” the statute of limitations shall be suspended during the period when the offender is outside Japan. In regard to this point, with respect to the meaning of “where the offender is outside Japan,” a judgment by the Supreme Court of Japan, 1st Petty Bench on October 20, 2009, Keishu Vol. 63, No. 8, p. 1052 (hereinafter, the “2009 judgment”) ruled that “according to Article 255, Paragraph 1 of the Code of Criminal
Procedure, even in cases of temporary overseas travel, time during which an offender is outside Japan is interpreted as suspending the statute of limitations.” However, that ruling is not applicable to this case.
Rather, considering the legislative purpose and history of the system for suspending the statute of limitations, the interpretation of the requirement “where the offender is outside Japan” should be limited to not include overseas travel of less than two months.
  1. As an initial matter, this case is completely different from the 2009 judgment. Specifically, given that the purpose of Article 255, Paragraph 1 of the Code of Criminal Procedure concerns difficulty in the service of charging sheets, since the case of the 2009 judgment relates to Japanese nationals who were working in real estate brokerage, construction, and employment of foreign technical interns, it is believed to be a case where a “workplace” at which to effect service other than the defendant’s address or residence (Article 54 of the Code of Criminal Procedure, and Article 103, Paragraph 2 of the Code of Civil Procedure) could not be identified. In contrast, Mr. Ghosn was working consistently at Nissan’s main office, so service could have been effected at his workplace at any time, and there would have been no difficulty whatsoever in serving him charging sheets.
  2. In addition, considering the legislative purpose and history of the statute of limitations system, the ruling of the 2009 judgment is not applicable to this case.
(1) Given that the system for the statute of limitations exists, the benefit to defendants,
namely not being prosecuted after time has passed, is protected by law. As such, provisions depriving such benefits should be interpreted narrowly and in line with their substantial grounds.
(2) Furthermore, relative to when the 2009 judgment was made, new mutual legal assistance treaties with the E.U. and Russia have also come into effect, and there has actually been a marked increase in the number of cases where mutual assistance for investigations
has been given. Therefore, there has also been a reduction in the degree of difficulty occurring in investigations when defendants are outside Japan.
(3) Considering the legislative history in the first place, given that the purpose of suspending the statute of limitations concerns difficulty in serving transcripts of charging sheets, since transcripts of charging sheets can be served in the event of temporary overseas travel, and in light of the aforementioned reduction in the difficulty of investigation, etc., there is scant substantial reason at this point to deprive this benefit.
Thus, cases where an individual who has a residence and workplace in Japan engages only in temporary overseas travel (specifically, overseas travel of less than two months, which is specified as the period to serve charging sheets (Article 271, Paragraph 2 of the Code of Criminal Procedure)) should be interpreted as not suspending the statute of limitations. Accordingly, in relation to Mr. Ghosn, who has a residence and workplace in Japan, the statute of limitations is not suspended for periods of overseas travel in which he re-entered Japan within two months from the date he left the country.
  1. Calculated excluding overseas travel of less than two months, of the [indictments] in Charging Sheet No. 2, dated January 11, 2019, the end date for the statute of limitations for the one with payment date of March 9, 2011, is August 7, 2018. Therefore, at the time of the indictment, the statute of limitations had already expired.
    Among the indictments stated in this Charging Sheet, the statute of limitations has also similarly
    expired for those acts that were completed on March 9, 2011, or earlier.
  2. Thus, among the indictments concerning Mr. Ghosn, the statute of limitations has expired for the indictments stated in the Charging Sheet, dated January 11, 2019 (excluding, however, the one with payment date of March 27, 2012). A judgment should therefore be
    rendered to dismiss them (Article 337, Paragraph 4 of the Code of Criminal Procedure).
III. Charged facts regarding the swap contracts
1. Mr. Ghosn is innocent.
  1. (1)  There is no recognizable act committing an aggravated breach of trust in executing the novation agreement in this case because the act is not one that gave rise to an actual risk that Nissan would incur a “financial loss” (Company Act, Article 960 (1)).
  2. (2)  No “financial loss” (Company Act, Article 960 (1)) was inflicted on Nissan whatsoever.
  3. (3)  No intent (Criminal Code, Article 38 (1)) can be recognized either, because Mr. Ghosn
    was unaware of and did not affirm inflicting “financial loss” on Nissan.
  4. (4)  It is also not recognizable that the purpose of executing the novation agreement in this case was in contemplation of “his own interests or the interests of a third party”
    (Companies Act, Article 960 (1)) because the purpose contemplated the interests of Nissan.
2. (1) In 1999, Mr. Ghosn came to Japan and became a director to turn Nissan around. Because Mr. Ghosn’s family resided in the U.S. and their living costs were generally based on U.S. dollars, he asked to be paid in U.S. dollars; however, Nissan refused to do so. Therefore, from around 2002, Ghosn entered into foreign exchange swap agreements with financial institutions to periodically sell Japanese yen and purchase U.S. dollars.
(2) At the recommendation of a representative at Shinsei Bank, who stated that U.S. dollars can be purchased at favorable rates, Mr. Ghosn entered into the swap agreements between Canayany and Shinsei Bank. The purpose of the swap agreements was to exchange the yen that Mr. Ghosn received as remuneration from Nissan into dollars, and Shinsei Bank created the agreements based on Mr. Ghosn’s current and future yen cash flow. While the swap agreements provided that a certain amount of dollars will have to be purchased at a below-market exchange rate when the dollar/yen exchange rate was 100 yen or 80 yen or below per dollar, from 1999 (when Mr. Ghosn came to Japan) until 2007, not once did the
dollar drop below 100 yen.
(3)  The bankruptcy of Lehman Brothers in September 2008 triggered a worldwide financial crisis. Because of the rapid appreciation of the yen, and at the same time the drastic decline of stock prices, the collateral Mr. Ghosn had offered Shinsei Bank based on the swap agreements became insufficient. After October 24, 2008, the person in charge at Shinsei Bank requested Mr. Ghosn for an immediate increase in collateral, or to terminate and pay penalty fees. In the midst of the financial crisis, it was not possible for Mr. Ghosn to procure the collateral required by Shinsei Bank in just a few days, and in order to terminate the contract and pay the penalty fees, Mr. Ghosn’s only option was to resign from Nissan and apply the retirement allowance to the payment. However, leaving Nissan in the midst of the financial crisis would cause irreparable harm to the company, and was not an option that Mr. Ghosn could choose. Mr. Ghosn proposed guaranteeing the obligations himself under the swap agreements to Shinsei Bank but Shinsei Bank rejected the proposal, and the idea was presented that Nissan’s guaranty would be acceptable. In this context, the proposal of shifting the contractual status of the swap agreements to Nissan until Mr. Ghosn could gather the collateral was considered, under the condition that the shift would be at no cost to Nissan.
(4)  After consideration by Shinsei Bank and Nissan’s Legal, on October 31, 2008, Nissan’s Board of Directors passed a resolution giving Ohnuma, the General Manager of the Secretariat Office, the authority to sign current or future FX forward contracts for non- Japanese executive officers (including directors) at no cost for the company.
(5)  The resolution granted authority to the General Manager of the Secretariat Office to
execute transactions to sell yen and buy a foreign currency for the benefit of non-Japanese executive officers in relation to their remuneration payment. The resolution presumed that losses caused by a transaction would be attributed to the executive officer and would be at no cost to Nissan. Therefore, as Nissan passed the resolution assuming the transaction was not a conflict of interest (Article 365, Paragraph 1 and Article 356, Paragraph 1, No. 3 of the Companies Act) and Shinsei Bank had the same understanding, on the same day, Nissan, Canayany and Shinsei Bank entered into a novation agreement to transfer the swap agreements from Canayany to Nissan.
(6)  As a result of the novation agreement, Nissan took over the right and obligation to sell yen and buy dollars on the exercise date every three months in relation to Shinsei Bank; however, as stated above, it was presumed that the losses would be attributed to Mr. Ghosn and that Nissan would not bear any responsibility. In fact, when a loss of 62,580,000 yen was incurred on January 30, 2009, from purchasing dollars under swap agreement, Mr. Ghosn paid the amount and Nissan did not bear any losses. The swap agreements were created based on Mr. Ghosn’s cash flow, so the agreements were to sell yen and buy dollars in relation to Mr. Ghosn’s payment. Therefore, Mr. Ghosn had the ability to bear any losses that arose in the future, and there was no risk that Nissan would bear the losses. Furthermore, along with Nissan’s termination of its retirement allowance program in June 2007, it had been decided that Mr. Ghosn would be paid a retirement allowance, and based on the amount of said allowance, it was sufficiently guaranteed that Nissan would not bear any losses.
(7)  Unlike Canayany, Nissan did not bear an obligation to Shinsei Bank to provide required collateral according to “fair market value” under the swap agreements. Therefore, while
the “fair market value” under the swap agreements was negative “1,850,405,142 yen” at the time of the execution of the novation agreement, Nissan did not receive a demand from Shinsei Bank to provide a required amount of collateral, nor did it receive a demand to pay penalty fees because collateral could not be provided.
(8) After that, while the contractual status of the swap agreements was returned from Nissan to Canayany on February 20, 2009, following Mr. Ghosn’s procurement of collateral, Nissan suffered no “decrease in asset value” whatsoever during this time.
IV. Charged facts regarding KJC
1. Mr. Ghosn is innocent.
(1) Each of the remittances to Khaled Juffali Company (“KJC”) underwent appropriate approval procedures as compensation, including expenses, for services that KJC, which is managed by Khaled Juffali, provided to assist Nissan’s business in Saudi Arabia, so Mr. Ghosn has committed no “act in breach of his duty” (Article 960, Paragraph 1 of the Companies Act).
(2) The $14.7 million that Nissan paid KJC in total are compensation, including expenses, for services conducted by KJC to assist Nissan’s business in Saudi Arabia. Accordingly, no “financial damages” (Article 960, Paragraph 1 of the Companies Act) have been incurred by Nissan whatsoever.
(3) As Mr. Ghosn did not recognize or approve of any “financial damages” to be incurred by Nissan, no intent can be recognized either (Article 38, Paragraph 1 of the Penal Code).
(4) Each of these remittances was executed for the purpose of promoting Nissan’s interest, namely the development of Nissan’s business in Saudi Arabia, so there is no purpose of promoting “his own interest or the interest of a third party” that can be recognized either (Article 960, Paragraph 1 of the Companies Act). Both the remittances from ParkView to the securities
account under the name of Tomanaga Holding Limited and the provision of the standby letter of credit have no relation to the purpose of the remittances from Nissan to KJC.
2. Mr. Juffali is a highly regarded businessperson from Saudi Arabia and Mr. Ghosn’s trusted friend.
Mr. Juffali is a highly regarded businessperson from Saudi Arabia. His predecessors in the Juffali family formed the “Juffali Group” conglomerate in the 1970s, and the Juffali family has been managing the largest corporate enterprise in Saudi Arabia, dealing in a broad variety of businesses including manufacturing, distribution and trade. Since becoming Vice Chairman of the Juffali Group, Mr. Juffali has utilized his own experience and abilities to develop ties with companies all over the world. Mr. Juffali has managed Khaled Juffali Company (KJC) since 2004.
Mr. Juffali has been Mr. Ghosn’s trusted friend for more than twenty years. When Mr. Ghosn met with Mr. Juffali occasionally during return visits to Lebanon and when attending international conferences, etc. such as the Davos conference, Mr. Ghosn sometimes sought Mr. Juffali’s advice with respect to business in the Gulf region.
In September 2008, the collapse of Lehman Brothers led to a global financial crisis. As a result, Mr. Ghosn faced a situation in which the collateral that he had provided to Shinsei Bank became insufficient based on swap contracts. Shinsei Bank required Mr. Ghosn to either immediately provide additional collateral or cancel the contracts and pay to settle the margin calls. In order to avoid having to resign from Nissan to settle the margin calls, Mr. Ghosn asked his trusted friend Mr. Juffali for help. Mr. Juffali cooperated with the issuance of a standby letter of credit for 3 billion yen to Shinsei Bank, but that action is unrelated to the purpose of the remittances of this case.
3. Nissan, whose business in Saudi Arabia was sluggish, sought KJC’s assistance.
The Middle East region is an important market for Nissan, and it was a region that was forecast to be especially profitable within the automotive industry. More specifically, Saudi Arabia, which has shown marked economic development, was a particularly important market for Nissan in the Middle East. However, Nissan’s business results in the Middle East were faltering and had largely fallen behind other Japanese and Korean companies in the industry. In particular, sales results in Saudi Arabia were very sluggish for many years. In 1957, Nissan designated Al Hamrani United Company (AUC) as a national sales company (“NSC”) for Nissan in Saudi Arabia, and it was selling Nissan vehicles as a local dealer. However, AUC’s business performance was very bad and it regularly failed to meet its objectives for unit sales. Against that background, there were circumstances of internal divisions surrounding management rights among the Al Hamrani family that manages AUC. It was very difficult to build a relationship between the Al Hamrani family and the Japanese company Nissan, as well as its subsidiary Nissan Middle East, and there were no signs of improvement. Nissan was in a predicament because it had signed an exclusive sales distributor agreement with AUC and had no choice but to sell Nissan vehicles through AUC.
In September 2008, since before the financial crisis, Nissan considered breaking through such circumstances in Saudi Arabia. As a means of doing so, Nissan decided to seek assistance from Mr. Juffali, who had cultivated connections due to his performance and reputation in business. As a result of repeated meetings from around May 2008 between corporate officer Gilles Normand of Nissan Headquarters, Atsuo Kosaka of Nissan Middle East and Mr. Juffali, the decision was made to establish a limited liability company through joint investment by Nissan’s 100% owned subsidiary Nissan Middle East and Al Dahana FZCO, which is jointly managed by Mr. Nassar Watar, an influential businessperson in the Gulf region. Upon receiving approval from Nissan Headquarters’ Executive Committee on July 18, 2008, Nissan Gulf FZCO was established in Dubai (United Arab Emirates). Nissan Gulf’s purpose was to oversee the NSCs in four countries in the
region, namely Saudi Arabia, Abu Dhabi (United Arab Emirates), Kuwait and Bahrain, and expand Nissan’s local market share.
Nissan asked KJC to assist Nissan’s business in Saudi Arabia by utilizing its business network and knowhow. Mr. Ghosn was receiving communications from Mr. Juffali regarding overall matters, and Colin Dodge and Mr. Normand were in contact with Mr. Juffali regarding local operations in Saudi Arabia.
The development of Nissan’s business in Saudi Arabia increased in importance due to the financial crisis. The financial crisis had a substantial impact on the Japanese economy, and the automotive industry in particular, which is a key sector in Japan, was deeply affected. Exports overseas declined because of the high yen and sales fell globally. Nissan was no exception. Mr. Ghosn took every measure to save Nissan from the financial crisis, and developing business in the Middle East, which was experiencing remarkable economic growth, particularly in the market of Saudi Arabia, was part of those measures.
4. KJC took initiatives and paid expenses on Nissan’s behalf to develop Nissan’s business in Saudi Arabia for the benefit of Nissan.
Starting in the second half of 2008, for the benefit of Nissan, KJC began providing services to develop Nissan’s business in Saudi Arabia and also paid expenses for those efforts on Nissan’s behalf.
For example, relying on his business network, Mr. Juffali conducted negotiations with the Al Hamrani family, which manages AUC, and improved the relationship between AUC and Nissan. As stated above, one of the reasons that sales of Nissan vehicles were stagnant in Saudi Arabia was that a dispute over management rights had unfolded within AUC, which led to their sales efforts being neglected. Nissan was considering terminating its distributor contract with AUC by declining to renew it. However, in that case, it was expected that doing so would result in litigation risk, an
accompanying loss of brand strength, and a further decrease in sales. Mr. Juffali negotiated with the Al Hamrani family and succeeded in reaching an agreement on a business plan targeting sales volume of 50,000 units for fiscal year 2009, along with the rough contours of an interim plan targeting sales volume of 100,000 units for fiscal year 2013, five years later. Results were achieved where AUC significantly increased the sales volume of Nissan vehicles, generating a sales volume in fiscal year 2009 that greatly exceeded the target of 50,000 units. Due to AUC’s significant improvement in performance, Nissan decided to renew their exclusive distributor contract on July 31, 2009. As a result, Nissan avoided the litigation risk, etc. that was expected in the event of not renewing the contract with AUC.
Furthermore, starting in 2007 or earlier, the Saudi Arabian government solicited various automobile companies to construct automobile plants in the hopes of cultivating an alternative industry to the crude oil industry and generating domestic employment. Around April 2007, Nissan was contacted by the Saudi Arabian government regarding construction of an automobile plant. Mr. Ghosn expected an increase in demand for automobiles in the Middle East and Africa, and an increase in production volume. He thought proactively that if an automobile assembly plant were constructed as a production base in Saudi Arabia, then depending on the requirements, it could be profitable in the future. Mr. Ghosn established a unit at Nissan Headquarters and assembled experts in various fields to consider constructing such a plant from the perspectives of logistics, manufacturing, the supply chain, etc. Mr. Juffali actively assisted in the negotiations with government agencies such as the Saudi Arabian General Investment Authority (SAGIA) regarding the requirements, and assisted Nissan’s plan to construct an automobile plant. Over time, from 2008 through 2013, Nissan continued to consider a plan to construct an automobile plant. However, this plan was not ultimately realized because the requirements for sustainability and profitability were not met.
Mr. Juffali also engaged in establishing a limited liability company for Nissan in Saudi Arabia. Mr. Juffali utilized the network he had cultivated in business and actively negotiated to establish the limited liability company for Nissan. As a result, a license to set up a limited liability company owned by Nissan and KJC was obtained from SAGIA around mid-2013. Nissan Saudi Arabia (Nissan KSA) was established in November 2014, 75% owned by Nissan and 25% owned by KJC, and Nissan has been able to sell its vehicles in Saudi Arabia from that point.
5. Nissan greatly benefited from Mr. Juffali’s business expertise in Saudi Arabia.
After conducting appropriate approval procedures, Nissan paid compensation, including expenses, to KJC for services to assist the business in Saudi Arabia.
After conducting proper approval procedures, Nissan paid compensation, including expenses, to KJC for services to assist the business in Saudi Arabia. When making those payments, allocations were made from the CEO Reserve budget, which is merely a line item, and special cash or bank account for the Reserve does not exist (see Section V. 5 for details). In addition, the strict procedures necessary for allocating the CEO Reserve budget have been followed completely.
In May 2009, based on an evaluation of KJC’s contribution and performance, Nissan decided to pay $3 million as compensation, including expenses.. This proposal was approved at the Executive Committee meeting held on May 21, 2009. An application for allocating the CEO Reserve budget to make that payment (Application for Budget Adjustment) was subsequently prepared on June 1, 2009 by Gilles Normand who was in charge of the Middle East. Signatures were given by Greg Kelly, who was in charge of the Office of the CEO, and Emmanuel Delay, who was the corporate officer in charge of accounting, finance and management planning, as well as Colin Dodge, the corporate officer in charge of overseas markets in general, and then finally by Mr. Ghosn. Further, a Decision Form Concerning Execution of Remittances (Decision
Form C) was prepared, and in addition to Colin Dodge and Gilles Normand, who both had knowledge of the local operations, this was also signed by Steven Ma who is Controller of the region.
The payments for the compensation, including expenses, from 2010 to 2012 were all completely executed by going through the same procedures and were approved by either a corporate officer handling finance functions or the CFO (Chief Financial Officer), as well as Gilles Normand and/or Colin Dodge, who were in charge of managing business in the Middle East.
V. Charged facts regarding SBA
1. Mr. Ghosn is innocent.
(1)  Mr. Ghosn has committed no “aggravated breach of trust” (Article 960, Paragraph 1 of the Companies Act). Of the July 25, 2017 payment of $5,000,000, approval for the payment of $2,500,000 was granted by Mr. Saikawa, not Mr. Ghosn. Additionally, the July 30, 2018 payment of $5,000,000 was granted by Mr. Saikawa, not Mr. Ghosn. For both of these amounts, there weren’t any “payments to be obtained by [Mr. Ghosn himself].” Both of these payments were made for the benefit of Nissan. There is no basis in fact that money was transferred, directly or indirectly, from SBA to Mr. Ghosn or his family.
(2)  No “financial damage” was inflicted on Nissan (Article 960, Paragraph 1 of the Companies Act).
(3)  Since Mr. Ghosn does not recognize or acknowledge that “financial damage” was inflicted on Nissan, intent cannot be recognized (Article 38, Paragraph 1 of the Penal Code).
(4) Because the payments in this case were made for the purpose of Nissan’s interests, they cannot be recognized as made for the purpose of “[Mr. Ghosn’s] own interest or the interest of a third party” (Article 960, Paragraph 1 of the Companies Act).
By offering incentives such as sales incentives to regional dealers, automakers maintain and increase market share, so sales incentives are an essential sales strategy for increasing vehicle sales volume.
Nissan is a global company that has production and sales bases around the world. In terms of sales bases, Nissan has Regional Headquarters, which are mainly wholly owned subsidiaries, in North America, Central and South America, Africa, Asia, the Middle East, etc., and the Regional Headquarters sell Nissan automobiles to National Sales Companies (NSC), which are local dealers that form the foundation of sales in each country or region. When a Regional Headquarters receives orders for sales from an NSC, it procures the Nissan automobiles from production sites around the world and sells (exports) them to the NSC.
Needless to say, NSCs are necessary for selling Nissan automobiles around the world, and they act as the front line in competing with other companies’ brands. The NSCs’ market share, sales volume and revenue are directly connected with Nissan Headquarters’ business performance in their countries and regions. Consequently, since Nissan Headquarters provides the NSCs of each region with sales incentives, preferential treatment on the terms of payment, etc. through the local Regional Headquarters, those NSCs continue to be Nissan dealers (without switching over to Toyota or Hyundai) and they are encouraged to give their best efforts at expanding the market share and sales volume of Nissan automobiles.
Incentives such as sales incentives are not necessarily fueled by past or expected sales performance by an NSC. The level of achievement toward numerical targets is an important factor, but is not everything. Various factors are considered when determining incentives, for
example the importance of that NSC’s existence as a Nissan regional dealer, its relationship with Nissan up to that point, and strategies for expanding Nissan’s market share and sales.
The Middle Eastern Gulf region is very attractive for Japanese automakers such as Toyota and Nissan for the following reasons.
1) The quality of Japanese and Asian-made automobiles, in particular the air- conditioners, engines, etc. which are highly durable in high temperatures and harsh climates, is highly regarded in the Middle East.
2) Profitability is higher than in other regions.
3) There is great potential as a developing market. For example, Toyota’s market
penetration is tremendous, which contributes to Toyota’s overall business
performance. Nissan also has room to recover the market share that it lost in the past. Nissan’s Regional Headquarters in the Middle Eastern Gulf countries is Nissan’s wholly owned subsidiary, Nissan Middle East F.Z.E. (NMEF). The following companies are representative NSCs in the region.
Arabian Automobiles Co. (AAC) (Dubai)
Saleh Alhamad Almana Co. (Almana) (Qatar)
Suhail Bahwan Automobiles LLC (SBA) (Oman) Rasamny Younis Motor Co. S.A.L. (RYMCO) (Lebanon) Al Masood (Abu Dhabi)
Bustami & Saheb Co. (Jordan)
Arata International (part of the SBA Group) (Iraq)
3. SBA was an essential NSC in Oman and other Gulf countries for expanding market share.
Suhail Bahwan Automobiles (SBA) is an automobile dealer belonging to Suhail Bahwan
Group Holdings (SBGH), the largest conglomerate group in Oman. SBGH’s founder, Suhail Salim Bahwan Al Mukhaini, is a very well-known and respected businessman not only in Oman but also in the Middle East and other parts of the world. When he was 15 years old, he started a business by loading up a dhow sailing vessel with date fruits, spending 40 days travelling to India, purchasing rice, oil and clothing, and returning to sell them in the town of Sur. Bahwan used the money he gained as capital to open a shop selling construction materials and fishing nets. He became a distributor for Toshiba and Seiko of Japan, and subsequently expanded into various areas such as electric appliances, watches, construction, telecommunications, food products and transportation. He served as consul general of Sweden, head of the Omani chamber of commerce, etc. His eldest son Mr. Ahmed Suhail Bahwan Al Mukhaini, studied auto industry management in the U.S. and subsequently took over SBA and then afterwards he formed his family group under the name of Bahwan International Group Holdings (BIGH) which now holds the shares of SBA. During his time at the helm, Ahmed has poured substantial financial resources into all of his auto-related businesses.
SBA became a Nissan NSC in the Gulf region in 2004. SBA sold Nissan automobiles not only in Oman but also through an affiliate (Arata International Trading F.Z.C.; Arata) in Iraq, Libya, Saudi Arabia and China.
In the early 2000s, Nissan’s market share in the Gulf region began to fall, and was considerably behind Toyota and Hyundai. The Middle Eastern region, with its high rate of population growth, high young population rate and the anticipated increase of the middle class population, was a region with growth potential for auto manufacturers. From around the time of the financial crisis until today, the strategy to expand the market in the Middle Eastern region continues to be Nissan’s key issue.
In FY2004 when SBA became Nissan’s NSC, SBA purchased a little over than 2000
automobiles with sales under $33 million. From that point on, its performance improved dramatically year on year, reaching sales of more than 23,000 automobiles for $400 million in FY2008. However, during the FY09, due to the effects of the global slowdown from the financial crisis sparked by the collapse of Lehman Brothers, sales failed to reach 20,000 automobiles. Both sales volume and revenue continued to pick apace after that year, reaching over 31,500 automobiles for $1 billion in FY2018.
SBA received awards practically every year granted to outstanding NSCs that significantly increased sales results for Nissan.
4. Changes to the terms of payment: usance
The financial crisis sparked by the collapse of Lehman Brothers that occurred in Fall of 2008 negatively affected auto sales throughout the world. The effects also extended to the Middle Eastern Gulf region.
Initially, SBA paid NMEF according to letters of credit (L/C) payable at sight. Around January 2009, SBA asked Nissan to make the terms of payment more flexible to achieve the double purpose of mitigating the effects of the crisis and supporting an aggressive sales strategy. Changes to the terms of payment cannot be made at the sole discretion of the Regional Headquarters. It needs to be approved by numerous people on various levels of responsibility and governance in accordance with Nissan’s strict internal procedures. In other words, the changes to the terms of payment will be approved when (1) the person in charge of sales at NMEF makes a proposal, (2) gets approval from the person in charge of NMEF Finance Department, (3) the head of said Department, (4) and from the President (MD) of NMEF, (5) is then reviewed by the department in charge of sales at Nissan Headquarters, (6) and subsequently by the Accounting Department, (7) and lastly, obtains final approval from either the Global Treasurer or the CFO at Headquarters. It is not possible for the CEO to make
changes to the terms of payment at his sole discretion.
Procedures to review and approve were conducted from January to February 2009 by NMEF and Nissan Headquarters. Over 10 people, including NMEF President Toru Hasegawa, Accounting Department Deputy General Manager Takahiko Ikushima at Nissan Headquarters and Nissan Headquarters CFO Alain Dassas, participated in the review and approval process. Starting from the first half of FY2009, a change of the terms of payment were approved so that the payment deadline would be 210 days after issuance of an L/C (the so called “usance”) and so that 3.0% interest would be paid during that period for yen- denominated L/C and 5.0% interest for dollar-denominated L/C.
After that, SBA’s terms of payment continued to change. All of the changes were made after a strict review and approval process, and implemented after NMEF, through the President, proposed them to Nissan Headquarters and after they were approved by the CFO and the Accounting Department General Manager at Headquarters by following the approval procedures according to the internal company rules. Mr. Ghosn has never arbitrarily eased SBA’s payment terms. He has never instructed or approved a decision to ease SBA’s payment terms beyond the solid corporate governance processes involving the above mentioned Nissan officers.
5. Payment of sales incentives to SBA from the CEO Reserve
The CEO Reserve is not “money that can be freely used by the CEO.” There is no special cash or savings account. The CEO Reserve is a line item in the yearly Nissan global budget which serves to support various types of Nissan expenditure and investments during a given year. The CEO Reserve is not a system set up only for paying sales incentives. It is normally used for unexpected expenses or investments that occur during the fiscal year. For example, it is used for the following purposes.
  •  Payments to hire talented executives
  • Emergency measures against unexpected product defects
  • Ad hoc measures to make synergistic or organizational improvements, engage in mergers, etc.
All payments and/or allocations from the CEO Reserve are duly recorded in the financial statements under the corresponding field which reflects the nature and type of payment, and is naturally subject to internal audit. In order to disburse company funds from the CEO Reserve, it is necessary to carry out special procedures for application/approval/final decision.
In the case of allocation and payment of sales incentives, first, the proposer must prepare a proposal containing the reasons why the disbursement is necessary, the date and amount of disbursement, etc., and then must present the proposal in front of the appropriate members of the Executive Committee (EC). The application/approval documents must be filled out with all necessary information, and the CEO, who is the decision maker of disbursements, ultimately approves after consent is received from Executive Committee members, the CFO and others. After such approval is granted, application/approval documents to actually pay the funds are prepared, and payments will be made after final approval from the vice president in charge (CVP or SVP). Whether it is the “CEO Reserve” or something else, and whether it is at Nissan Headquarters or Regional Headquarters, it is not possible for the CEO to disburse company funds at his own discretion.
From June 2012 to July 2018, sales incentives were paid to SBA by NMEF from the CEO Reserve expense item a total of ten times.
June 10, 2012: $3 million
October 18, 2012: $2 million
June 20, 2013: $4.5 million
July 2, 2014: $2.5 million
March 11, 2015: $2 million
June 17, 2015: $3 million
December 30, 2015: $2 million
January 9, 2017: $3 million
July 25, 2017: $5 million
July 30, 2018: $5 million
These payments were generally determined and executed in the following way. In the beginning of each year, NMEF and SBA would check the sales results from the previous fiscal year and whether the numerical targets established in the previous year were achieved. They then would establish the numerical targets to be achieved for the current year and the conditions for payment of the incentive.
The General Manager of the Middle East at Nissan Headquarters (CVP or SVP) prepared an approval application for the use of the CEO Reserve (Application for Budget Usage). Final approval was received from the CEO after consent was obtained from the CFO, related EC members, the executive officer in charge of the office of the CEO and others.
After the approval is granted, the General Manager of the Middle East at Nissan Headquarters prepares a document to approve the disbursement (Decision Form C), and after review by the General Manager of the Accounting Department, the General Manager of the Middle East (CVP or SVP) makes the final decision.
Based on the approval process and final decision within Nissan, NMEF and SBA would enter into a Memorandum of Mutual Understanding (MoU) between them, and NMEF’s President and SBA’s President or Chairman would sign the MoU. NMEF would make
payments to SBA based on Nissan’s decision and following the signature of the MoU.
Of the July 25, 2017, payment of $5,000,000, which is the basis of the charge in this case, approval for the payment of $2,500,000 was granted in March 2017 when Mr. Ghosn was still CEO. However, the payment of the remaining $2,500,000 was approved by Mr. Saikawa, who was CEO at the time. In addition, Mr. Saikawa also approved the July 30, 2018 payment of $5,000,000.
From FY2011, which is the fiscal year before 2012 when these incentive payments started, to FY2017, SBA’s automobile purchases averaged 35,000 vehicles per fiscal year with a yearly average of procurement value of $807,000,000. The ratio of the average amount of yearly cash incentives ($4.28 million) to the yearly procurement value amount ($807,000,000) was 0.53%.
In this way, payments of the sales incentives were determined and executed following stringent internal company procedures. The amounts were also appropriate and reasonable as management strategy for Nissan to maintain and expand its market share in the Middle Eastern Gulf region.


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Yes, Tom Woods; Corporations ARE Unlibertarian. And the Massive Regulatory State and Rampant Crony Capitalism Are the Result.

June 12th, 2015 4 comments

[Note: this started as a Facebook post, which is also open for comment.]

I have been bugged by friends to share some thoughts on the recent discussion (January 2015) between Tom Woods​ and Stephan Kinsella on the “libertarian-ness” of corporations, which was held on the Thomas Woods​ Show, and which they have respectively posted, with supporting references:

I’ve had countless discussions with Stephan on this topic, chiefly when the Ludwig von Mises Institute ran an open blog; many great conversations were lost when LvMI closed down the blog, but the interested reader can find some of my own conversations here (I backed them up to a personal LvMI blog, and further migrated them when those too were closed by LvMI):

Here are a few thoughts that I shared privately with someone, both in advance of listening to Stefan and as the talk show proceeded:

He’s missing how the state provision of the legal entity structure, and especially the limited liability aspect, has, by risk socialization flowing from shareholders’ incentives to turn a blind eye (to NOT be involved in decisions that hurt others) fuelled the growth of the snowballing and ever-more captured regulatory state.

He mis-states here completely how corporations came about — they were all one-off, special purpose and limited-duration monopolies created in the public interest, not charters that the government let you file that were just like limited partnership agreements.

I am happy that he says state incorporation statutes (and government-made corps, presumably), should be done away with.

His statement that legal entity status is a convenience for the benefit of creditors is basically hogwash — without entity status, creditors could sue ANY (all if they wanted) partners and employees, and let THEM either bring others in as co-defendants or let them work out indemnification arrangements. Entity status is not favor to creditors.

He’s finally making some of the arguments that I did years back — that the favors granted in creating corporations are an excuse/justification for endless meddling by governments in business affairs.

I’ve proposed marked deregulation of non-corporate businesses and of corps whose owners keep a risk tail (i.e., in the case that equity is only partially paid-in, so that directors would have a capital call on shareholders if claims were to exceed assets), but Kinsella instead is trying to say that all government “favors” are meaningless, so government regulations of the corporations they create were never justified. —

It’s an argument that entirely ignores the easily accessed history of harms that, because corporations were made in the “public interest”, courts let corporations get away with, so that people had to go running to legislatures to beg government to “do something” about the corporate Frankensteins that the government had set loose. And it ignores that corporations drive regulatory capture and that the big ones are the partners of government — so much so that it has long been damned-near impossible to tell where business ends and government begins.

He says it would be a good thing if we removed legal entity status — I appreciate this, but in fact, of course, everyone (and Stephan himself) uses Stephan’s argument to deflect criticism from corporations and crony capitalism.

He speculates that “that wouldn’t lead to unlimited liability” for shareholders, but that’s largely a strawman — shareholders could be sued, and would have to bear costs of defense, which would make them quite interested in making sure the execs/manages/employees weren’t running around creating risks/hurting people. Just POTENTIAL exposure to risk gets people’s attention, and cutting that off is a massive subsidy to corporations.

Of course business firms that aren’t corporations could outlive their founders — through a gradual handover to younger generations, bringing in others, etc. But the natural, common law methods of business organization (partnerships, family businesses, cooperatives and associations) keep the owners very, very interested in making sure possible successors are brought up within the firm and understand employees, customers, suppliers, community members, etc., and in carefully monitoring the activities of such possible successors.

The artificial, statist corporation form loosens the bonds of mutual accountability  among owners, and between employees/other community members.

As for limited liability; he’s right about voluntary creditors — that voluntary counterparts can agree to limit each other’s liability to “business assets” only, and to exclude the personal assets of owners.

But as for the involuntary tort creditors, creating the corporate form and eliminating any possible liability of shareholders has had the clear consequence of totally muddling WHO it is that is acting and who should be responsible for torts — so we ended up totally eviscerating the old doctrines of privity of contract, grossly expanding the notion of “respondeat superior” (so corporate assets are on the hook, even when it isn’t clear what INDIVIDUALS ought to be liable for harms) and a lessening of accountability within firms. (Witness the confusion of Stephan and Lew Rockwell regarding the catastrophic BP Horizon blow out a few years ago, when they proclaimed that “BP” was the “biggest victim” of the catastrophe, without identifying whether the victims were those killed, workers generally, managers, execs or shareholders, and that “accidents happen”.)

I agree that “ownership” shouldn’t necessarily imply personal responsibility when innocent persons are harmed in the course of corporate business activities — my point is that shareholders should NOT be automatically excluded from POTENTIAL liability. By excluding them entirely for liability the effect has to been fashion unnaturally large pools of assets and capital that are managed by executives who are agents for no principals whatsoever, leading to a host of nonsense, including not simply a massive Regulatory State and rampant crony capitalism, but to nearly powerless shareholders in listed companies whom themselves claim to be “victims” whenever Bad Shit “happens.”

His argument that shareholders aren’t “owners” is garbage; it’s another post facto argument, and itself statist. Until this point, he argued that shareholders were just like partners/limited partners (who just have indemnity agreements that spread out individual liability for claims by making each other mutually responsible) –now he’s arguing that, hey, because the shareholders BY LAW have no responsibility, they shouldn’t be considered “owners”.

He then makes the point — which I made to him years ago — that if shareholders were exposed to risk, they would just buy INSURANCE — so the world would NOT collapse and everything would just go on as before. Well, not so fast — if shareholders had potential risk exposure and wanted insurance, it would be a COST that they would have to bear — and what he’s actually doing is acknowledging that, at least as to the cost of such insurance (which would vary company by company, industry by industry), government is now currently SUBSIDIZING corporations (or at least being shareholders in them).

As a result, his “net of causality” for torts has been totally confused.

His argument that shareholders may not contribute a dime directly to the corporation is technically true, but that’s another post facto argument. If there was no corporation, then any new partner in a partnership would certainly, if not also be making a partnership contribution, be directly undertaking obligations to the other partners.

All of the D&O and other liability insurance that Kinsella refers to have real costs; the bigger the firm, the more government-afforded protection, and the less important these costs are. Further, of course, thanks to the government-granted “get out of potential liability free” card (in the form of limited liability), shareholders in corporations don’t have to face costs and risks of monitoring, insuring or self-insuring for potential liability or hassles of being sued by injured persons if damages exceed the assets of whoever proximately caused them or the insurance coverage and business assets of the firm. These things matter, and we face greater risks and reduced incentives (and corresponding markets) to monitor and manage risks as a result.

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Fixing the Rules of the Game to require MORE “SKIN IN THE GAME”.

April 21st, 2015 No comments

[from a Facebook post]

Fixing the Rules of the Game to require MORE “SKIN IN THE GAME”.

I’m not suggesting “removing limited liability,” because this would both be changing the rules of the game for existing shareholders and of course be vehemently opposed by existing firms. Rather, we need for states to start deregulating for small businesses whose owners/shareholders do not hide behind limited liability, live in the communities in which they operate and hence are susceptible to claims of damage by local people. There’s no reason to think that these organizations would remain tiny; Lloyds of London used to be a huge syndicate of unlimited liability names, Amex used to be a LISTED unlimited liability corporation, and there still are some fairly large partnerships.

As I have said elsewhere, “a curtailment of limited liability for torts could be hedged by shareholders via insurance, and could be achieved by state governments and the federal government offering more lenient regulation to business enterprises that operate as partnerships, unlimited liability corporations, or in cases where shares are NOT “fully paid up” so that calls for significant additional capital could be made against shareholders if needed to pay claims. “Creative destruction” by new firms will eventually bring down the limited liability firms.”

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Imagine reining in governments and the corporate Frankensteins they make

April 21st, 2015 No comments

[from a Facebook post.]

Governments, themselves largely unaccountable institutions guided and staffed by persons who are personally unaccountable, create corporate Frankensteins that are owned, guided and staffed by persons who are personally unaccountable.

When “accidents happen”, our Big Brother may either shrug or rush in to “protect” us some more — in ways that are sure to enhance the power of government and to create more regulations that will reduce competition (and thus favor the existing larger firms in a particular industry), while leaving each of us with LESS power to do anything personally or collectively to protect ourselves — in the case of the massive #BP Horizon blowout, remember how the Feds stopped gulf states and towns from laying out their own booms to limit damage, and stopped people from digging on public beaches to take oil samples?

Corporations, made by the state, are truly “The Health of the State”.

IMAGINE, however, (1) if business was conducted only in organizations whose owners retained potential personal liability (as a partnership, association, or corporation whose shareholders only partially pay-in their equity commitment) and lived adjacent to their riskiest businesses, and (2) if old tort doctrines allowing people whose persons/property were damaged by others’ pollution to enjoin/stop such practices were still respected. In this case, the personal skin in the game of owners/execs, face in the community, personal risk to liability, and agreements with insurers would incentivize all to greatly reduce risk — in a manner that EMPOWERS people in the community around the business operations.

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Fun with Kevin Gutzman, or, Does Citizens United apply to state limitations on what “speech” their corporations can engage in?

November 6th, 2014 No comments

Historian and Constitutional scholar Kevin Guzman posted a comment on his Facebook wall on the Citizens United decision that I took a disliking to.

Here is his September 6, 2014 post and my responses (to him and his other commenters):

There’s a popular meme that “Corporations aren’t people.” The aim is to repeal the Supreme Court’s decision in Citizens United that Congress cannot under the Speech and Press Clauses of the First Amendment limit political advertising so stringently as it had been under the McCain-Feingold Act. The point of the meme is that only people are entitled to constitutional protections, and so Congress can do whatever it wants to corporations. Let’s follow the implications of the claim that “Corporations aren’t people.”

So you’re going to deny corporations constitutional rights. Does that mean the government will be able to search corporations’ property without warrants? Take their property without trial? Try them without counsel? Censor their publications? Punish them under ex post facto laws? House soldiers in their property during peacetime? Force them to pay to support churches?

At least as early as Dartmouth College v. Woodward (1819), the Supreme Court recognized that corporations do indeed have rights of individuals. To say that they didn’t would mean empowering government in new and dangerous ways. Besides, we all know that shareholders–corporations–are people. They’re not hamsters. They’re not sandwiches. They’re not automobiles. They’re people.


September 7 at 1:24am

Tokyo Tom Kevin, this is an interesting an important topic, which hasn’t been set up very well. 

First, I think you missed the gist of the Dartmouth case, which essentially said that NH couldn’t alter Dartmouth’s charter (which had been granted by the English Crown), because the corporate charter was a form of private contract that was protected from “impairment” by states under the Constitution. The case was brought by the Trustees of Dartmouth, and didn’t particularly “recognize that corporations do indeed have rights of individuals.” States responded by reserving greater powers when they create corporations.…/students_in…/dartmouth.html


September 7 at 1:32am

Tokyo Tom Hopefully, we’re all clear on the fact that corporations are created by governments, were traditionally considered as forms of contracts and property rights, and have special powers, rights and characteristics provided by state legislatures that render them quite different from real, live human beings?

Unfortunately, many on the Left and Right are confused about the origin, history and nature of corporations. As I said to some progressives:

“Sadly, it seems that most if not all of the progressives here want to deny what cannot be denied: that corporations exist only because they are made by acts of legislative power of Governments. They also want to deny that the special characteristics that Govt give to “corporations” are the very attributes that lead to harms to others/social ills that continually fuel more regulation of corporations by governments.

“It’s hard to discern why they have these views–perhaps, because they are so ingrained in seeing Govt as their sole savior in fighting against corporate Frankensteins–but they are clearly incorrect, as a legal and historical matter.
Be that as it may, as a matter of understanding and attacking the roots of our problems, it behooves progressives to investigate and understand how government and corporations shape the incentives and influence the behavior of the people who find themselves within them.

“Not only do corporations exist only because of Govt, but it is clear that the reasons why corporations play such negative roles in society and have corrupted Govt are their state-granted characteristics that would NOT exist in a “free market”. Sole proprietorships, partnerships, associations and co-operatives do NOT have#LimitedLiability, unlimited lives, unlimited purposes, and the businesses do not have legal entity status different from the owners.…/corporations…


September 7 at 1:47am

Tokyo Tom Corporations have continued to find the Federal government and Supreme Court their friend in escaping control by the states that created them; see this pre-Citizens United post about the perversion of the anti-discrimination (due process/equal protection) provisions of the 14th Amendment (that used “persons” to protect freed slaves and unnaturalized Chinese) to require various states to treat corporations made in other states the same as their own corporations:…/corpspeak…/


September 7 at 1:51am

Tokyo Tom Karl Pope’s thoughts after Citizens United are largely spot on, and explain the drive that Sen. Colburn is now sponsoring to convene a Constitutional Convention to consider amendments:…/carl-pope-sierra…/


  • Kevin Gutzman It’s impossible to remove money from politics. If you deny individuals the right to buy political ads, you’ve effectively elevated owners of media corporations to the status of Elite Class, as only they will be able to say what they want. On the other hand, the Tenth Amendment reserves power to regulate elections to the states; if they want to ban donations from out-of-state interests or individuals, they should be allowed to do so. Score another negative result for the Incorporation Doctrine.
  • Kevin Gutzman I think that all federal campaign regulation is unconstitutional, as nothing in the Constitution empowers Congress to regulate anything other than the “time, place, and manner” of elections. At the federal level, there’s no reason not to have a sunshine law requiring disclosure of all donations.
  • Tokyo Tom Good point, Savana — states can and should be able to condition any corporate license on things that the corporation cannot do in its own name, such as lobbying. 
    Such a conditioning of the grant of corporate charter would be Consitutional, and would NOT deprive any individual of his own rights to lobby (or to combine with other employees to do so).If we want to get crony capitalism and the runaway regulatory state under control, we should simply stop granting #LtdLiability to corporate shareholders, and restore shareholder responsibility to monitor risk management by executives and managers.…/immodest…/

    Tokyo Tom Kevin, I didn’t realize that “deny[ing] individuals the right to buy political ads” was the premise here, but denying the “right” of state-made entities to buy political ads, make contributions etc.
    • Tokyo Tom From my own Constitutional analysis, corporations, as artificial things, don’t “speak” at all (just as a printing press doesn’t speak either); people speak. Unfortunately, corporations (including media corporations) HAVE become ways for people to mask WHO is speaking. I think it perfectly acceptable under state corporation law and under the 1st Ad to constrain certain types of corporate “speech”.

    • Kevin Gutzman Big money wins? Big money often loses. Google “Michael Huffington” or “Clayton Williams” and see what you find. Let people know who is doing the contributing.
      Note: I agree with Savana that foreign contributions should be illegal. In theory, they already are, although Bill Clinton took advantage of them, (in)famously.
    • Kevin Gutzman The idea that I should be forced to contribute to Hillary2016! thrills me about as much as being forced to help fund the Westboro Baptist Church.
      Tokyo Tom SCOTUS has the First Amendment wrong -this was intended to bind tie Feds, at a time when corporations were profoundly despised and considered property of their shareholders, with rights only grudgingly granted by states.
      Property doesn’t “speak,” even as every single shareholder and employee retains full personal speech rights.
      Kevin Gutzman “Groups of people are not people.” — ISIS
      Tokyo Tom Mark, without corporations, are people UNABLE to associate to conduct business together?
      Corporations are creations of governments. People are not. Nor are voluntary associations of people, as businesses/partnerships, co-ops, unions or churches.
      Tokyo Tom ISIS? “of course a few less than enlightened people are not seeing the distinction between an inactive band of musicians and a band of terrorists involved in current world affairs.”
    Kevin Gutzman Right, they’re sheep.
    Special sheep with all the constitutional rights of individuals that they are capable of exercising–as I enumerated in my original post. The only one they don’t have is, “coincidentally,” the one the Democratic Party doesn’t want them to have.
    From Dred Scott to present, that’s the way Democratic Party “constitutionalism” works.
    Tokyo Tom “Of course corporations have the same rights as people. A corporation is not a tangible thing. It is an abstract term describing a group of organized individuals/people.”Balderdash on a stick, that we are reminded of in the cases of BP and Fukushima. Show me any individuals without a government-made liability shield who could do the damage that corporations (and governments do). Where are the mass torts? The Superfund sites?

    Individuals, business partnerships and coops can all be kept in check (to a significantly greater degree) by others in the communities in which they live.…/quot-biggest…/

    Kevin Gutzman Tokyo Tom, I got off at “Senator Joe Barton.”
    Tokyo Tom State-made corporations are the health of the massive regulatory state, which is likewise the health of the crony corporations. It’s a rachet, and racket.
    Are you a Bootlegger, or a Baptist?
    Tokyo Tom Let’s look more at BP as a “person”:|

    • Jim Hightower:
      “And now, its rap sheet grows almost daily. In fact, the Center for Public Integrity has revealed that the oil giant’s current catastrophic mess should come as no surprise, for it has a long and sorry record of causing calamities. In the last three years, the center says, an astonishing “97 percent of all flagrant violations found in the refining industry by government safety inspectors” came at BP facilities. These included 760 violations rated as “egregious” and “willful.” In contrast, the oil company with the second-worst record had only eight such citations.
      While its CEO, Tony Hayward, claims that its gulf blowout was simply a tragic accident that no one could’ve foreseen, internal corporate documents reveal that BP itself had been struggling for nearly a year with its inability to get this well under control. Also, it had been willfully violating its own safety policies and had flat out lied to regulators about its ability to cope with what’s delicately called a major “petroleum release” in the Gulf of Mexico.

      “What the hell did we do to deserve this?” Hayward asked shortly after his faulty well exploded. Excuse us, Tony, but you’re not the victim here — and this disaster is not the work of fate. Rather, the deadly gusher in the gulf is a direct product of BP’s reckless pursuit of profits. You waltzed around environmental protections, deliberately avoided installing relatively cheap safety equipment, and cavalierly lied about the likelihood of disaster and your ability to cope with it.

      “It wasn’t our accident,” the CEO later declared, as oil was spreading. Wow, Tony, in one four-word sentence, you told two lies. First, BP owns the well, and it is your mess. Second, the mess was not an “accident,” but the inevitable result of hubris and greed flowing straight from BP’s executive suite.
      “The Gulf of Mexico is a very big ocean,” Hayward told the media, trying to sidestep the fact that BP’s mess was fast becoming America’s worst oil calamity. Indeed, Tony coolly explained that the amount of oil spewing from the well “is tiny in relation to the total water volume.” This flabbergasting comment came only two weeks before it was revealed that the amount of gushing oil was 19 times more than BP had been claiming.
      Eleven oil workers are dead, thousands of Gulf Coast people have had their livelihoods devastated and unfathomable damage is being done to the gulf ecology. Imagine how the authorities would be treating the offender if BP were a person. It would’ve been put behind bars long ago — if not on death row.
      [link above, past the Joe Barton part]

      And here’s a couple of fun video clips riffing on the nature of the unaccountability of corporate/BP execs (not to mention the absentee shareholders, “protected by limited liability” who are themselves “victims”):…/satire-oil-spill…/…/time-light-humor…/

      Tokyo Tom Corporations are “Special sheep with all the constitutional rights of individuals that they are capable of exercising,” Kevin?
      Hah. Try limited liability for one.…/speech-and…

      Tokyo Tom Corporations are the Health of the State. Is this why you and other good “conservatives” cheer them on, Kevin?
      Tokyo Tom Timothy, can I recommend you look at well-known Republican shareholder activist Robert Monks, and “drone corporations”?
      The most abusive crony corporations tend to be a low-performing bunch of listed firms, with no significant shareholder blocs:

      Tokyo Tom Stacey, yes, my problem is with “corporatism” and how government-made corporations are the hand-maiden of both the snowballing state, crony capitalism, and confused people across the spectrum bewailing or defending “capitalism!” and “free markets”. is the natural result of governments creating Btw,
      1. BP is half Amoco, and ofc operates in the US through subsidiaries. Did you miss this in my quote? In the period just before 2010, “an astonishing “97 percent of all flagrant violations found in the refining industry by government safety inspectors” came at BP facilities. These included 760 violations rated as “egregious” and “willful.” In contrast, the oil company with the second-worst record had only eight such citations.”

      2. They “are sorry individuals, should they not have rights?”

      Which “they” are you talking about, and for what purposes? If you are talking about “speech”,” then in the case of BP, who is it who is speaking, and for whom? Who speaks for workers killed? Shareholders? Management? Who are the principals, and who are the agents?

      Every individual in BP/connected to BP retains personal rights to speak, and can form voluntary groups to do so if they wish–the doctrine Kevin is pushing is a socialist/collectivist one that DENIES individual accountability and and MASKS self-interest, thus forcing those who interact with or are affected by BP into a position where, since individual accountability is near-impossible, to seek government assistance in getting at least some collective responsibility, but little private redress — very little of whatever the government ends up collecting from BP will actually trickle down, and individuals will remain beholden to the government and to BP for risk management going forward, rather than having direct rights.

      See my above clips on BP cats and the Clarke and Dawe spoof for light takes on unaccountability and who speaks for whom.

      Kevin Gutzman Tom, you have got to be kidding. The reason Obama wants to muzzle corporations is so that he can take more of our money and give it to his constituents, invite more Guatemalans to come here and become his constituents, etc. He sees them as an obstacle, and so he wants to undo American legal precedent dating all the way back to the days when a ratifier of the Constitution was chief justice of the Supreme Court. And you say that I am the one who is pushing statism. Since the Revolution of 1937, there has never been a time when the Democratic Party stood for originalism in constitutional interpretation; they always argue for new, unknown doctrines that advance redistribution, secularization, etc. This new idea that corporations don’t have the rights of individuals is more of the same.
      Tokyo Tom The purpose of the First Amendment was to protect we the people from acts of the Federal government, NOT to protect state-created corporations from the governments and people who make them.The Federal government, this time through the Supreme Court, continues to play the role of helping elites, through state-created corporations, to destroy free markets and local representative government.

      I’m sorry to see so many deluded “conservative” cheerleaders for this.

      Tokyo Tom The answer to the following question is “NO”: [Does it make any sense to treat corporations as “persons”, given the differences in incentive structures?]…/sense-treat…/
      • Kevin Gutzman Give me a break. The new argument that government can regulate corporate purchases of political advertizing is entirely about protecting incumbents from criticism. McCain said so, explicitly.
        Kevin Gutzman If you think advertizing against Obama is “destroying free markets,” we speak different languages.
      • Tokyo Tom Whip conflation now, Kevin. Try addressing my actual arguments.
      • Kevin Gutzman Show me where the Constitution gives Congress power to regulate purchases of political ads by corporations. You can’t, because it doesn’t. The argument that it does is based on the “reading” of the Commerce Clause invented by Klansman Black and his fellow FDR political hacks in the 1930s. It’s completely contrary to the 10th Amendment.
      • Tokyo Tom I’m not a fan of the Feds regulating anything, Kevin. But the states that make corporations sure as hell have a right to limit what they can do in exchange for very special privileges granted.
      • Tokyo Tom But I already addressed the First Ad several times upthread. Corporations are THINGS, not people. Things don’t “speak”, at least for Constitutional purposes.
      • Tokyo Tom My argument doesn’t refer to the absurd Commerce clause jurisprudence at all.
      • Tokyo Tom “The new argument that government can regulate corporate purchases of political advertizing is entirely about protecting incumbents from criticism.”
        I am sure that this IS the case now, but the argument against allowing corporations to speak (why does NYT get special treatment?) is 100+ years old — pretty sure I copied in a Teddy Roosevelt quote upthread.But you’re a HISTORIAN; you know this already.

        • Stacey York Morris States that “make” corporations? Huh?
        • Tokyo Tom Stacey, yes. Surely you’re aware of “corporation laws”, and checked out the Dartmouth case (rare exception of a one-off corporation made by King George). Corporations are creatures of governments — there are NO “free market” corporations.
        • Tokyo Tom The American Taliban is alive and well in “conservatives” who reflexively defend as “free markets” the corporatism that has always fuelled the “Progressive” movement.
          We have our own Sunni and Shia, battling over who gets to control the State:…/state…/

          Stacey York Morris States don’t create corporations. They tax them but thats not creation. I’m a teeny corporation and trust me, the state did nothing. States don’t have the right to silence them one bit. They do court them but that’s because they bring jobs for their state and lots of tax money. States like Maryland and California blackmail and harass them to death. Charge them for infrastructure and tax them at the federal rate which is highest in world, so they may find a state that is more friendly, but that’s not “creating” them. King George wasn’t a capitalist.
          Tokyo Tom Stacey, unfortunately you’re sounding more like a liberal all the time, with the wrinkle that they deny that governments make corporations because it’s their view that the evil aspects of corporations are due to “capitalism” and “greed”, while with you it’s a desire to defend “free markets” from “greedy” and “grasping” GOVERNMENTS (did you NOT read the Sheldon Richman piece that you posted above)?Undeniably, corporations are made by governments; the fact that governments have, via a race to the bottom have “democratized” the process doesn’t change its nature. Rather, it simply masks the deep roots of corporatism and the reasons for the regulatory state.

          I explained this upthread already, with excerpts from this blog post:


          • Brett Sylvester ^ Funny how advocates of free markets can perfectly predict the property norms that would arise in the absence of a sate…
          • Tokyo Tom Brett, if you’re talking to me, I fail to see how you’re addressing anything I’ve said.
            Propertyrights continuously evolve in all societies, as technology, demand, mores and institutions change.So?

          • Tokyo Tom Jeff, focus. We’re only talking about the corporate form – which is undeniably a creature of governments and not free markets. Our Founding Fathers all knew this, and detested the Crown’s corporations/monopolies - does the original Tea Party not ring a bell?
            But you raise an important issue - the deep entanglement of government with business that flows from government creation of corporate forms is what underlies people bashing “business” and “capitalism” when they mean corporatism, as well as why they think governments have rights to micromanage business.
            • Kevin Gutzman I reference specific provisions of the Constitution, and Tom invokes proto-fascist Theodore Roosevelt. Non sequitur.
            • Kevin Gutzman I agree that states have a right to regulate corporate behavior. I oppose the Incorporation Doctrine.
              Kevin Gutzman Since a corporation’s holdings are the pooled property of its shareholders, yes, it has fiduciary responsibility for the property to which they have a natural right. That’s why in Dartmouth College v. Woodward (1819), Chief Justice Marshall spoke of the shareholders’ rights in considering the College’s claims.
              • Kevin Gutzman Some corporate crimes lead to incarceration of officers, some don’t.
                The reasons there’s a move to deny that corporations have rights are two: 1) that some politicians don’t like being criticized, and so want to ban corporations from contributing to campaigns against them (as McCain said in explaining the McCain-Feingold Law); and 2) that there’s a general tendency for the Federal Government to deny all rights as they come to mind, and Citizens United brought this particular set to mind.
              • Tokyo Tom “I reference specific provisions of the Constitution, and Tom invokes proto-fascist Theodore Roosevelt. Non sequitur.”Hah. The historian can’t recall or research the history of his own thread.

                Kevin, you said “The new argument that government can regulate corporate purchases of political advertizing [sic] is entirely about protecting incumbents from criticism”; I didn’t disagree as to Dem motives now, but simply said “the argument against allowing corporations to speak (why does NYT get special treatment?) is 100+ years old” and referred to your proto-fascist Teddy Roosevelt.

              • Tokyo Tom “I agree that states have a right to regulate corporate behavior. I oppose the Incorporation Doctrine.”Glad we agree on the first point; on the second, with the exception of Citizens United (on the First Amendment), much of the history of extending Constitutional rights to corporate “persons” has been of “Incorporation” — viz., making the Bill of Rights applicable to state and local governments through the due process clause of the Fourteenth Amendment. Corporations now have fourth amendment safeguards against unreasonable regulatory searches; fifth amendment double jeopardy and liberty rights; and sixth and seventh amendment entitlements to trial by jury.

                You oppose these extensions to state-made corporations, presumably, Kevin?

                Then you also OPPOSE the Supreme Court’s SUMMARY extension of its new First Amendment doctrine to the STATES via the 14th Ad “Incorporation” doctrine, in the 2012 Montana case, American Tradition Partnership v. Bullock?

                If you are, then I commend you — other than your failure to point it out to people on this thread.


              • Tokyo Tom Brett: “You’re claiming that society would necessarily not be ordered in a certain wayin the absence of a state, when there’s no reason that it couldn’t be.”No, I’m not; I’m just saying that corporations are made by governments and have rights granted by governments, and observing that these are rights that you and I don’t have — owners of unincorporated businesses don’t have limited liability to persons who they may injure, we die, etc.

                As Marshall said in Dartmouth: “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”

              • Tokyo Tom “in Dartmouth College v. Woodward (1819), Chief Justice Marshall spoke of the shareholders’ rights in considering the College’s claims.”

                You speak with great authority of matters that Marshall doesn’t address in his opinion. His chief point is to determine that the grant of Dartmouth’s charter was a CONTRACT among the Crown, the founders (donors) and Trustees — not a trust with fiduciary obligations:
                “This is plainly a contract to which the donors, the Trustees, and the Crown (to whose rights and obligations New Hampshire succeeds) were the original parties. It is a contract made on a valuable consideration. It is a contract for the security and disposition of property. It is a contract on the faith of which real and personal estate has been conveyed to the corporation. It is, then, a contract within the letter of the Constitution, and within its spirit also ….”

              • Tokyo Tom “The 14th Amendment applies to Americans.”
                Due Process and Equal Protection apply to “persons” (there were plenty of non-naturalized Chinese, and the Amendment also had to clarify state and federal citizenship), which is how railroad and other corporations have been able to escape the states and capture the feds.
              • Tokyo Tom “The reasons there’s a move to deny that corporations have rights are two:”And then there are those who want to breathe real meaning back into “federalism” and states rights, and to end the conflation of corporation=business and crony capitalism=capitalism. 

                The key to regaining control over our lives from Big Brother and Big Corporations isn’t the Federal government, but by reining in corporations/revising corporation laws state-by-state.

              • Tokyo Tom HEY THREAD FOLLOWERS —

                Kevin indicated above that, because he opposes the 14th Amendment “Incorporation Doctrine,” he “agree[s] that states have a right to regulate corporate behavior.”
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Corporations exist only because they are made by acts of legislative power of Governments

December 2nd, 2013 No comments
Cross-posted from the “we build our society” group on Facebook:
Sadly, it seems that most if not all of the progressives here want to deny what cannot be denied: that corporations exist only because they are made by acts of legislative power of Governments. They also want to deny that the special characteristics that Govt give to “corporations” are the very attributes that lead to harms to others/social ills that continually fuel more regulation of corporations by governments.

It’s hard to discern why they have these views–perhaps, because they are so ingrained in seeing Govt as their sole savior in fighting against corporate Frankensteins–but they are clearly incorrect, as a legal and historical matter.

Be that as it may, as a matter of understanding and attacking the roots of our problems, it behooves progressives to investigate and understand how government and corporations shape the incentives and influence the behavior of the people who find themselves within them.

Not only do corporations exist only because of Govt, but it is clear that the reasons why corporations play such negative roles in society and have corrupted Govt are their state-granted characteristics that would NOT exist in a “free market”. Sole proprietorships, partnerships, associations and co-operatives do NOT have #LimitedLiability, unlimited lives, unlimited purposes, and the businesses do not have legal entity status different from the owners.

Fixing our society requires fixing corporations; here are some useful reads:…/…/Hx_Corporations_US…/13_spring_daedalus_GomorySylla

The fact that now corporations are easily made does not alter their essential nature as creations by Governments. But even if you want to play that game, the fact remains that to fix our problems we need to reform the building blocks of heavily Govt-influenced “capitalism”. If we don’t we are simply disempowering ourselves, while growing a fascist, job-destroying corporate police state.

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Part 2: Dialogue on MoralHazard, fixing the financial sector and certainty of knowledge:

September 25th, 2013 No comments

[Cross-posted from the “we build our society” Facebook group:]

Doug said: “I honestly don’t know how to punish or hold those responsible for screwing up the economy. I don’t know the best recommendations. I don’t know what should be regulated and what shouldn’t. I do know that I want the violence to end, because that approach, I believe, has gotten us here. My approach would be this: first, let’s take away the moral hazard created by government regulators and the Fed. Maybe in so doing, we would make things like derivatives completely obsolete because they wouldn’t be profitable. In fact, in that sort of environment, I don’t even think we would have a financial sector, at least, in the form it is in currently.”

Terry then added (my responses in brackets inside):
“There is no first; it’s all or nothing. Maybe you don’t know what business has done, but I surely do. And I just as suredly know what would be the right medicine.
[There is no perfect knowledge, so in general, economies do well that leave problems and solutions in the hands of the people who have the most skin in the game, rather than centralizing them.]

The gov’t didn’t initiate moral hazard in instituting regulation, moral hazard is “in economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk.” Moral hazard was exclusively created by the business activity of risk reduction by uncontrolled credit default swaps of structured debt that backfired and caused 2007-2009. The gov’t didn’t create the moral hazard, business did. And it influenced the regulations in order to get away with it.
[Wrong–the #MoralHazard in the banking/financial sectors was very much created by government, though of course the self-interested within the regulated firms did their best to influence what government did. I will comment on the roots of MoralHazard separately. What those within the regulated business (and government) did was to act in their own self-interest, freed from much concern that they would be help personally accountable by depositors, shareholders, counterparties or citizens for what they did.]

We have to address gov’t snippings and business snippings at the same time. And I would argue, I think largely rightly, that the violence the gov’t perpetrated on us was in the bailout.
[The roots are much deeper, but the bailouts were certainly wrong, both morally and as a “cure” for the “crisis”.]

So, get rid of what I have suggested both in business and gov’t. My plea was for proper regulation (ie, addressing business fraud, derivatives — credit default swaps — and infrastructural items such as microfrequency trading, a freeze on all new negotiable investment banking instruments until economists have had time to work out the consequences, kicking business out of gov’t regulation, possibly doing away entirely with the non-commodities side of Wall St except as information providers for individual decisions, and prosecutuon for those responsible for 2007-2009) and infrastructural changes. Both parties must be operated on at the same time. Absolutely. Swiftly.
[I am for strict regulation of financial firms, for as long as government is holding the rest of society hostage to its false “protection” of us. But the REAL solutions involve in making everyone involved in the sector, starting with the depositors and shareholders, more personally responsible for looking out for their own financial interests. This may only happen if we free up responsible, well-managed competitors, such as offering lower regulation for banks that have lower deposit insurance, or that are operated as partnerships rather than as corporations.]

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Post-Fukushima, signs that 'Arab Spring' and #Occupy movements have arrived as Japanese seek to wrest control of civil society from Government.

December 16th, 2011 No comments

[Note: Kiyoshi Kurokawa, one of the co-aothors of the op-ed described below, headed up a recent and criticasl report regarding the Fukushima accident.]

Have the concatenation of the Fukushima meltdows on the heels of the Tohoku earthquaketsunami disaster FINALLY spurred ordinary Japanese to act after nearly three decades of disastrous bungling and irresponsible economic management by the Japanese government? The answer appears to be a modest yes.

The Japan Times ran an interesting article on December 1, by two policy wonks at Japan’s National Graduate Institute for Policy Studies (Hiromi Murakami, assistant professor and Kiyoshi Kurokawa, M.D., an academic fellow) (emphasis added):

Fukushima crisis fueling the third opening of Japan

Prime Minister Yoshihiko Noda’s announcement that Japan would join talks on a Pacific free trade agreement (FTA) triggered a nationwide debate over whether to open Japan’s market.

While this is certainly a useful discussion, the issue facing Japan is far larger. The Fukushima nuclear power plants crisis further exacerbated the problems Japan already had: an aging society, the hollowing out of manufacturing industries, a huge fiscal deficit, a widening income gap, and the sustainability of its governing system.

The fundamental question is thus not one of joining FTAs. Rather it is how we Japanese can carry forward a third “opening” and depart from our aging, dysfunctional system.

The Fukushima disaster has shaken the foundations of our system as it has proven all of its fundamental assumptions false. Fukushima turned Japanese citizens from believers into skeptics of the government.

Deep disappointment in the government has transformed people from apathetic bystanders to proactive citizens, creating innovative financial schemes without relying on the government and committing themselves to energy conservation and reduced dependence on nuclear energy by shifting their priorities and preferences.

Neither the shock of the Lehman bankruptcy, the asset and stock bubble collapses, nor 20 years of stalled economic growth, have had much of an impetus to change, but Fukushima ignited in Japan a great transformation at the grass-roots level. Just as the “Spring” movements have been demanding change in the systems of Arab countries, so civil society has finally started to blossom in Japan. Because Japan’s rather unhealthy one-party-dominated “democracy” has lasted over a half-century, the country is still inexperienced in translating fragmented individual voices into balanced public policies. Thanks to the spread of tools like Twitter and YouTube, and the catalyst of foreign nongovernment organizations, linking these voices may eventually lead to long-overdue domestic reform, altered voting patterns and changes in Japan’s outlook.

Since the Meiji Era, we have had complete confidence in our bureaucratic system and the strong policymaking institution of the “Iron triangle,” backed by strong economic growth. This iron triangle continued to survive until today partly because people continued to trust in bureaucracy and political/social institutions. This myth was completely broken after the Fukushima disaster, which revealed to everyone that there was no functioning system in place to deal with the crises. People watched as politicians produce lists of excuses for not cooperating and bureaucrats fought for jurisdiction while failing to make decisions, terrified of taking risks in such an unprecedented situation.

Instead of relying on the government, people started to act independently through grassroots and civil movements in various parts of Japan. In other words, the third opening, or the great transformation in values and social norms, is finally occurring in Japan.

Led by the governing class of samurai, Japan experienced its first opening during the Meiji Restoration, triggered by the threat posed by Commodore Matthew Perry’s Black Ships. The second opening was led by Gen. Douglas MacArthur, when the Allied occupation government initiated reforms and political purges after our disastrous defeat in World War II. While the past two openings were driven by external factors in a top-down fashion, the third opening has been triggered internally by the Fukushima disaster. It is a civil-sector-driven, bottom-up transformation.

While the authorities failed to deliver substantive action, individuals started to act. Many donated money for the first time and participated in voluntary activities; scientists gathered to offer credible information and explanations via Twitter; voluntary individuals in various regional areas monitored radioactivity levels and gathered data through the Internet that they made immediately made public; and parents organized and demanded that the authorities measure ground and food radioactivity levels in kindergartens and schools, which quickly became the norm. Japanese citizens now strongly demand transparency, so that they can judge how to protect themselves.

Energy shortages due to the Fukushima disaster have had a profound impact on individuals’ priorities and lifestyles. Households and corporations achieved 18 percent energy conservation last summer in Tokyo through various efforts. How to better preserve the environment for future generations has now become a part of our thinking. LED lights, expensive household fuel cells and wood-burning stoves are selling surprisingly well; and the demand for solar panels is exceeding supply.

Innovative trials are now taking place that will have even greater effects on a larger social and economic scale. The “2:46 Quakebook,” promptly published online worldwide, established new ways to donate money to Tohoku. Innovative microfinancing schemes have been operating to help small businesses that are desperately in need of cash at a time when traditional financial institutions are reluctant to take risks. The Tomodachi Initiative, a public-private partnership led by the governments of Japan and the United States, whose programs include the fostering of entrepreneurship, is also making an impact.

Fukushima gave us a great opportunity to transform our way of life and recognize that individuals can make difference in the society if they act together. Long-overdue reforms are possible today as established barriers weaken and room for innovation emerges. For its democratic system to truly function, Japan’s infant civil society still needs to learn from other societies by establishing horizontal links in various sectors, including NGOs, researchers and scientists. This is a chance to get globally connected and gather global expertise.

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Unwinding limited liability: Can we roll back the regulatory state by shifting ultimate responsibility for managing risks to enterprise owners?

November 15th, 2011 No comments

[This is an edited re-post.]

Libertarians have not quite focussed on how the state grant of limited liability to shareholders – something that cannot be obtained merely by voluntary transactions) has set in motion and greatly fuelled the growth of the state and battles over the wheel of government — battles in which insider elites, generally acting through corporations, have the overwhelming advantage.

I have posted extensively on limited liability; for the interested reader perhaps the following post will be a quick introduction:

The Cliff Notes version of my stilted enviro-fascist view of corporations and government

For those of you who prefer NOT to let their fingers do the walking, I have noted elsewhere that (ed: some slight revisions):

I am NOT arguing FOR a general rule that shareholders SHOULD be liable for corporate torts; rather, I have:

(1) pointed out that limited liability itself has served to muddle the question of whom, exactly, should be responsible for the very real harms that corporations frequently cause,

(2) noted that the limited-liability corporate form has enabled risk-generation and -shifting on a massive scale, with innocent third parties frequently being stuck holding the bag (not simply when liabilities exceed assets, but more generally since the cycle of escalating government interventions to rein in corporations perversely ends up raising barriers to entry and giving corporations “rights” to engage in activities that damage others, which rights curtail recourse even when sufficient assets are available),

(3) argued that libertarians should reconsider the grant of limited liability for torts (as opposed to limited liability as to those who contract with the corporation on a voluntary basis) not simply because it is clearly non-libertarian to begin with, but because it has had profound consequences in feeding the snowballing and increasingly centralized regulatory state– consequences at a serious enough level that state-loving libertarians concede simply by troubling themselves to argue against curtailing limited liability,

(4) noted that the most efficiacious way to roll back the regulatory state lie in the direction of shifting ultimate responsibility for managing risks to enterprise owners (and ending the counterproductive regulatory risk-management experiment), and

(5) noted that a curtailment of limited liability for torts could be hedged by shareholders via insurance, and could be achieved by state governments and the federal government offering more lenient regulation to busness enterprises that operate as partnerships, unlimited liability corporations, or in cases where shares are NOT “fully paid up” so that calls for signifcant additional capital could be made against shareholders if needed to pay claims. “Creative destruction” by new firms will eventually bring down the limited liability firms.

It is perfectly appropriate to examine the justifications FOR and the consequences of the state grant of limited liability; for this purpose, I disagree with Kinsella that one must first “provide a theory of liability that coherently distinguishes shareholders from any other patron of the company”.

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